Fed watchers say rate cut likely in July

Bloomberg

The weak US May jobs report pushes the Federal Reserve closer to cutting interest rates, though maybe not all the way just yet.
While a reduction when policy makers meets later this month can’t be ruled out, Fed watchers said their base case is for the central bank to stand pat. But they said the abrupt slowdown in payrolls growth last month — against the backdrop of President Donald Trump’s escalating dispute with major US trading partners — does increase odds the central bank will cut rates perhaps as soon as July.
Payrolls rose 75,000 in May after a downwardly revised 224,000 advance the prior month, according to a Labor Department report. The increase missed all estimates in Bloomberg’s survey calling for an increase of 175,000 and follows other softer readings on the economy.
Barclays Plc economists Michael Gapen and Jonathan Millar responded to the report by projecting a half percentage-point cut next month which they had previously anticipated in September; they now anticipate another reduction of a quarter point in September,instead of at year-end.
Julia Coronado, founder of MacroPolicy Perspectives LLC in New York, also pulled forward her existing call for interest-rate reductions following the jobs report. She now expects quarter-point cuts in July and September, sooner than the September-December cuts she previously anticipated.
“If this came in a tranquil environment I don’t think they’d be contemplating rate cuts on the back of it,” Coronado said, noting that jobs gains in May were still strong enough to keep up with population growth. “But we’re not in a tranquil environment.”
Coronado said that while a June cut wasn’t out of the question, that’s not her call.
“In light of mounting evidence of a faster deceleration of economic momentum over the medium-term, Bloomberg Economics now estimates that the Fed will remain on hold for the foreseeable future. We believe that it is premature to forecast rate cuts — as low unemployment will fortify consumer spending — but if trade tensions continue to escalate, policy makers may be forced to act later this year,” say Carl Riccadonna and Yelena Shulyatyeva, Bloomberg economists.
JPMorgan Chase & Co. chief US economist Michael Feroli agreed. “I doubt they go in June, but I wouldn’t put a zero probability on it,’’ the former Fed staffer said.
“We obviously feel more confident that they’re going to be easing’’ this year following the jobs report, he added.
Feroli’s base case for now remains for two quarter-point rate cuts this year, in September and December. But “it could be sooner than September and it could be more than 50’’ basis points, depending on what happens to the economy, he said.
The federal funds futures market shows a quarter-point cut almost fully priced in for July, and indicate about 70 basis points of easing by the end of 2019.
Fed Chairman Jerome Powell and his colleagues meet on June 18-19 to map monetary strategy. Powell opened the door to a possible rate cut earlier this week when he said the Fed “will act as appropriate to sustain the expansion.’’
The weak jobs report comes after a string of mostly soft economic data. Retail sales, factory output and home purchases have shown the economy struggling this quarter after better-than-
expected growth in the first three months of the year.
Business confidence is also being dampened by Trump’s simmering trade war with China.
“The risks of Fed rate cuts have clearly increased,” Goldman Sachs Group Inc. Chief Economist Jan Hatzius and his team said in a note to clients.

MORE EVIDENCE
Bank of America economists Joseph Song and Michelle Meyer said the jobs report supports their view that Fed will reduce rates in September and December.
“We continue to believe it is too early to move in June as the Fed will likely want to see further evidence of weakness before easing,’’ they wrote in a note to clients.
Policy makers may also want to wait until after leaders of the Group of 20 nations meet at the end of this month so as to get a clearer picture of where the
US disputes with China are heading, the Bank of America economists said.
“That said, the Fed will likely send a very dovish message at the June meeting,’’ they wrote, adding that the employment report “clearly puts July in play for a cut.’’