NEW YORK–Expectations that the Federal Reserve will start cutting interest rates have surged in recent days, and the Fed funds futures market suggests a better than 50-50 chance that the central bank will announce a cut at its meeting in July, according to one new analysis.
In fact, JPMorgan Chase is now forecasting a rate cut is in the offing.
Such moves would be a surprise turnabout for the central bank. As CUToday.info reported at year-end 2018, many had forecast the Fed would actually move to increase rates twice in 2019. It has now done so once, but has since indicated it will not make another move until 2020.
“This stark change in expectations coincides with a deterioration in the outlook for growth, after a month of worsening trade relations and slumping stock markets,” the New York Times reported. “The stakes are high. Throughout the decade-long bull market, stock investors have repeatedly taken their cue from the Fed’s interest rate decisions, which have infused fresh life into stocks. But the surge in expectations for rate cuts over the next few months could leave the market vulnerable to any sign that the Fed is wavering on the matter.”
Cut May be ‘Warranted’
On Monday, the Times noted, St. Louis Fed President James Bullard said in a statement that lower rates “may be warranted soon.”
Meanwhile, yields on government bonds have tumbled in a sign that investors see a weaker economy coming, the Times added.
“The yield curve inversion is a market signal that the Fed is too tight,” James Bianco, president of Bianco Research, an economic consulting firm in Chicago, told the New York Times. “It’s raised rates too much.”
Two More Cuts?
Separately, JPMorgan Chase has cut its year-end predictions for yields and interest rates, and predicts that the Federal Reserve will cut rates in the second half of this year, according to Barrons.
“Even before the White House threatened tariffs on Mexican imports, Fed funds futures implied two to three rate cuts by the end of next year,” Barrons reported. “Markets now imply two to three 25-basis-point rate cuts by the end of this year.”
Added the JPMorgan Chase analysis, “The May data cycle—which begins next week—will be too soon to look for the effect of either the Chinese or Mexican tariffs. If we are on track for Fed easing, we would expect to see deterioration in the business sentiment data, and subsequently hard activity data, beginning in early July.”