Wall Street traders are increasingly betting on the odds of an interest rate cut by the Federal Reserve this year – and on Tuesday, Chairman Jerome Powell hinted policymakers at the U.S. central bank could respond to the recent escalation in the U.S.-China trade war by lowering rates.
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U.S. stocks celebrated the news, with the Dow Jones Industrial Average jumping over 500 points.
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Powell, during a listening event in Chicago on Tuesday, said the Fed is closely watching how global trade developments will impact the U.S. economy, noting that policymakers were prepared to act as necessary to sustain near-record expansion.
“We do not know how or when these issues will be resolved,” he said. “We are closely monitoring the implications of these developments for the U.S. economic outlook.”
The CME’s FedWatch Tool, which analyzes the probability of rate moves for upcoming Fed meetings, is currently predicting a 55.9 percent chance of a rate cut in July, with 49.7 percent of traders anticipating the benchmark federal funds rate will be moved into the 2 percent to 2.25 percent range. Only 13.6 percent of traders think interest rates will remain at the current range of 2.25 percent to 2.5 percent by September.
And last week, when the bond curve inverted – meaning the yield on the 10-month Treasury bill interest rate fell below the yield on the 10-year-treasury note, a common foreshadowing of an impending recession – the market sent a strong message to the Fed that interest rates were too tight.
“That is a very clear message that the bond market believes interest rates are too high,” Tom Essaye, the founder of Sevens Report Research, told FOX Business. “We haven’t seen that in a decade, probably more. The Fed is ignoring that, and they have their reason, but if it doesn’t change soon, they’re going to have to factor that in. And then the question becomes, have they waited too long? Are we already headed for trouble?”
It’s not only Powell who’s made a dovish pivot in recent weeks.
James Bullard, the Federal Reserve Bank of St. Louis President, suggested on Monday that the central bank may need to cut rates due to muted inflation, the inverted yield curve and ongoing uncertainty about trade.
U.S. inflation picked up in April after a weak start to the year, but at 1.5 percent, remains well below the Fed’s preferred target of 2 percent, spurring rate cut talks.
Bullard is a voting member of the FOMC committee this year.
“A downward policy rate adjustment may be warranted soon to help re-center inflation and inflation expectations at target and also to provide some insurance in case of a sharper-than-expected slowdown,” he said.
Despite all the fanfare around a looming rate cut, Bank of America CEO Brian Moynihan isn't buying in. “I don’t think they will unless something goes really wrong in the trade, I think the economy is stronger than people think,” Moynihan said during a discussion with FOX Business' Maria Bartiromo at the Economic Club of New York on Tuesday.