Fed not likely to go aggressive on interest rate cut this year

Bloomberg

The Federal Reserve will likely cut interest rates this year but not nearly as aggressively as investors expect, according to a Bloomberg survey of economists.
Respondents to a June 7-12 poll saw policy makers lowering rates by a quarter point this year. That’s a meaningful shift since March — when economists anticipated a hike in September — reflecting a darkening global economic outlook driven in part by President Donald Trump’s escalating dispute with major US trading partners.
Still, economists believe the Fed won’t rush into a rate cut. None of the 43 respondents saw policy makers acting when they meet next week in Washington. The median survey response pointed to a quarter-point reduction in December. Sixteen respondents expect the Fed to keep rates steady all year and two anticipate a quarter-point hike.
Investors, by contrast, are pricing in 70 basis points of easing by the end of 2019, based on federal funds futures contracts.
“The Fed will signal it stands ready to cut rates if downside risks materialise, but it does not want to pre-emptively lower rates before seeing evidence of much slower growth in the economic data,” said Kathleen Bostjancic, an economist at Oxford Economics in New York.
Data showed US retail sales posted a broad-based gain in May and the prior two months were revised higher, suggesting support for the economy from healthy consumer spending that may ease near-term pressure for a move.
Fed officials gather June 18-19 in Washington. Economists and investors alike will be on the lookout for any signal that policy makers intend to cut at their next meeting, in July. The Fed is scheduled to release a policy statement at 2 pm on Wednesday followed 30 minutes later by a press conference with Chairman Jerome Powell.
In the survey, nearly three quarters of respondents predicted the Fed will drop a reference to being “patient” from their post-meeting statement, replacing it with language similar to recent comments made by Powell about “closely monitoring” developments and promising to “act as appropriate” to sustain the economic expansion. About half also anticipated the statement will make a specific reference to trade negotiations.
Reinforcing the shift in sentiment, more than two thirds said risks to growth and inflation are tilted primarily to the downside, up from 50% in March, and from 4% a year ago. The chief source of that concern moved decisively from the more general “slowing global growth,” to the specific “international trade disputes.” More than 60% of respondents listed the latter as the most serious threat to US economic growth in 2019.
Ryan Sweet, head of monetary policy research at Moody’s Analytics Inc. in West Chester, Pennsylvania, said he doesn’t expect a cut this year, unless the trade landscape worsens.
“The assumption in our baseline is that an agreement is made” with China, he wrote. “If a deal isn’t struck or Trump escalates the tensions by imposing tariffs on the remaining $300 billion in Chinese imports after the G-20 meeting, then we will likely alter the forecast to include the Fed cutting rates this year, possibly in July.”