No June Rate Cut & Dovish Guidance

No June Rate Cut - Dovish Hold

There was No June Rate Cut as the June Fed decision was a bit of a curve ball. In summary, this was a dovish hold.

However, the details weren’t what investors expected as I will review in this article. Firstly, all the Fed members but one voted to keep rates the same in June.

Only Bullard voted for a 25 basis point cut. He has been dovish for the past few months. It’s good to see him stick with his word. That gives him credibility.

Fed technically, didn’t guide for a cut this year. Median Fed funds rate in 2019 stayed at 2.4%. I initially thought that would cause a big decline in stocks. There wasn’t a huge decline because the Fed expressed dovishness differently.

As you can see from the dot plot below, 7 FOMC members stated they see two rate cuts in 2019. 1 Member sees one rate cut, 8 see no rate cuts, and 1 sees one hike.

Even though the median stayed at no cuts, many Fed members actually see two cuts.

No June Rate Cut - To me, this shows the Fed will cut rates twice if there is an all-out trade war with China and hold rates steady if there’s a trade deal.

It also potentially means the policy makers looking for two rate cuts might have been non-voting members besides Bullard who we know is a voter and a dove. He definitely sees two cuts this year.

Guidance for 2020 rates was exactly what I expected. I expected it to fall 50 basis points. I thought it would be because of no hikes in 2020 and one cut in 2019. But it ended up being because of guidance for two cuts in 2020.

Personally, I still think it’s more likely we see cuts this year than next year because I think the trade situation will either get much worse or be resolved soon. I don’t see it dragging out 8 more months and then either being resolved or becoming an all-out war.

President Trump will put 25% tariffs on all Chinese goods within the next few months. That is, if negotiations don’t go well or make a deal.

Analysis Of The Statement Changes

No June Rate Cut - Now let’s look at the changes to the June Fed statement. I took out one paragraph in the statement that had no changes.

In the first paragraph, the Fed stated economic activity rose at a “moderate” rate instead of a “solid” rate. Economic growth is slowing if you follow the Cass Freight index. Real GDP growth will be lower in Q2 than Q1.

This slight downgrade in economic activity is dovish. It sets the scene for rate cut projections.

If the Fed cuts rates in July and still states economic activity is moderate, it sets a bad precedent. Fed is supposed to cut rates in sharp slowdowns, not when growth is near the long run projection. I thought more economic weakness would be needed before cuts. But maybe the Fed has changed the threshold for cuts.

The next change was that the Fed said, “household spending appears to have picked up from earlier in the year.”

No June Rate Cut - That’s different from in May when the Fed stated, “household spending slowed in the first quarter.” The Fed made that May statement based on the weakness in real personal consumption growth in Q1.

Recently, April retail sales growth was revised much higher and May sales growth was solid. It’s interesting to see some Fed members guide for 2 cuts while saying the consumer has improved.

Next the Fed said, “business fixed investment has been soft” which is almost the same as its May statement where it wrote business fixed investment “slowed in the first quarter.”

No June Rate Cut - The next change was about inflation.

It wasn’t much of a change because the Fed stated core and headline inflation “are running below 2%” instead of saying they “have declined and are running below 2%.”

Inflation has been below 2% for some time, so there’s no need to say it has fallen below 2%. The bigger difference was on market based measures of inflation. Instead of saying they have “remained low in recent months”, the Fed said they “declined.”

That’s factual as the 10 year breakeven rate is down from 1.98% on April 25th to 1.61% as of June 17th.

The final changes are on guidance.

No June Rate Cut - Fed added the point that “uncertainties about this [economic] outlook have increased.” That’s because more tariffs can tank the economy and a trade deal can lift the cloud of uncertainty, spurring economic activity.

Biggest change in this statement was getting rid of the point that the Fed will be “patient.” Remember, patience was the most important takeaway from the May meeting. I’m not surprised it’s gone because the Fed will cut rates sometime in the next couple meetings.

Just like Oxford Economics predicted, the Fed wrote it is “closely monitoring” the incoming information. That information is trade news. If it was economic data, the Fed would have said that.

Instead the Fed put it is monitoring the implications of this information for the economic outlook. The Fed will “act as appropriate to sustain the expansion.”

In other words, the Fed’s goal is to avoid a recession.

No June Rate Cut - If the trade war gets worse, it will cut rates to help the economy. If a trade deal is made, the Fed won’t act because the economy should stay in expansion mode.

Fed probably didn’t mention the trade issue directly to avoid political pressure and because it allows the Fed to be open to any other information that might affect the economy.

No June Rate Cut - Conclusion

Some investors might have been surprised that the Fed didn’t guide for a cut this year and the stock market rallied.

Stocks rallied because it guided for rates 50 basis points lower in 2020 and 7 Fed members stated they think rates should be cut twice this year. The Fed is open to all options.

It doesn’t want to promise a cut and have a trade deal occur which boosts economic activity, making the cut unnecessary. I’m fairly certain we will know if a trade deal is near or if an all-out trade war is coming by the July 31st meeting.

The G-20 meeting is in slightly more than one week.

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