Traders are currently predicting the Federal Reserve will lower interest rates three times by the end of the year, but according to executives from UBS and Goldman Sachs, the markets might be overstating the chances of a cut.
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Expectations that policymakers at the U.S. central bank will lower borrowing costs increased this week after Chairman Jerome Powell hinted the Fed is willing to cut interest rates, depending on how global trade uncertainties impact the U.S. economic outlook. Stocks rallied on Tuesday after Powell’s dovish comments.
But Axel Weber, chairman of Swiss bank UBS Group AG, warned Thursday that markets -- and traders -- need to lower their expectations for the Fed to cut rates in the near term.
“The market has overpriced the amount of rate cuts the Fed will do,” Weber said on a panel discussion during a meeting of the Institute of International Finance in Tokyo. “There is no imminent rate cut.”
Goldman Sachs Group Inc. President John Waldron reiterated that same view during the meeting.
"It worries me how much influence the Fed has on market sentiment right now," Waldron said. "The markets are over pricing what the Fed is likely to do in the near term, and I think it will be really interesting to see how the Fed weighs sentiment versus data."
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.
In his speech on Tuesday, Powell stressed that policymakers would respond if inflation remains persistently low, although he did not specify what actions the Fed would take.
“In this setting, a similar low-side surprise, if it were to persist, would bring us uncomfortably closer to the ELB,” he said, referring to the effective lower bound for interest rates. “My FOMC colleagues and I must — and do — take seriously the risk that inflation shortfalls that persist even in a robust economy could precipitate a difficult-to-arrest downward drift in inflation expectations.”
The Fed has not lowered the interbank lending rate since 2008, under President Barack Obama, in the aftermath of the financial recession.