Is a Fed rate cut all but guaranteed this year, thanks to low inflation?

By The FedFOXBusiness

Potential impact of trade tensions on Fed policy

WSJ Assistant Editorial Board Editor James Freeman, former Dallas Fed adviser Danielle DiMartino Booth and former Assistant Commerce Secretary Nicole Lamb-Hale on the impact of tariffs and potential Federal Reserve interest rate cuts on the markets and economy.

At the beginning of the month, Federal Reserve Chairman Jerome Powell made a significant pivot from the monetary policy he’d been espousing since the start of the year: the U.S. central bank, he hinted, was prepared to cut interest rates if inflation remained persistently low.

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Two weeks later, the Bureau of Labor Statistics released its May inflation data, revealing that the Consumer Price Index for All Urban Consumers remained relatively stagnant, with prices up just 0.1 percent. It was the smallest increase in inflation since January.

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“Inflation rates hardly budged in May,” said Curt Long, the chief economist and vice president of research at the National Association of Federally-Insured Credit Unions.

The CPI takes into account the weight prices of consumer goods and services, like transportation, food and medical care. This was the fourth consecutive month that, after stripping out energy and food, core prices advanced just 0.1 percent. The indexes for used cars and trucks, recreation and motor vehicle insurance were among those that declined over the month.

Wall Street was closely watching the metric -- which can be used to determine whether the economy is slowing -- for signs that borrowing costs might be lowered sooner, rather than later. The low reading prompted new calls for the U.S. central bank to lower the benchmark federal funds rate.

Coupled with low PCE inflation -- the Fed’s preferred measure because it excludes food and energy prices -- rose a seasonally adjusted 0.31 percent in April from March and 1.5 percent from a year earlier. It remains well below the Fed’s target range of 2 percent.

Powell has previously emphasized the importance of the 2 percent inflation range, which he said is consistent with a healthy economy.

“Other members of the FOMC have begun openly considering a rate cut to spur price growth back to target,” Long said. “NAFCU expects that the combination of weak inflation, slowing economic growth and ongoing trade risks will prompt a rate cut in the third quarter.”

The Federal Open Market Committee will hold a two-day policy-setting meeting from June 18-19.

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Economists mostly expect the Fed to keep rates steady at the current range between 2.25 percent and 2.5 percent, although the CME’s FedWatch Tool, which analyzes the probability of rate moves for upcoming Fed meetings, is currently predicting a 25 percent chance of a rate cut in June. Most traders -- 67 percent -- think policymakers will lower rates to 2.00 percent to 2.25 percent during their July meeting.

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