Ian Pollick believes today’s rate decision by the Federal Reserve has become a “circus.”
That, said the head of North American rates strategy at CIBC World Markets, is because the market’s entire focus is on whether the U.S. central bank trims its key rate or, at least, signals a cut at its July meeting.
Federal Reserve chair Jerome Powell has left the door open for a rate cut at some point soon, but several observers don’t believe that’s warranted at this point even though the market is increasingly betting on it.
Federal Reserve chair Jerome PowellYuri Gripas/Reuters
“It is turning into a circus by coming down to just ‘do they cut, do they not cut?’” Mr. Pollick said of this afternoon’s decision.
“This is one of the most important moments the central bank has faced in the entire cycle,” he added.
“Will they allow the market to push them around when the data have little discernable evidence that more stimulus was needed? And, how do other asset classes outside of bonds respond? Are low rates still good for equities, [or] are they not? It just feels like there is a growing chasm between what this should be about and what the market is forcing it to be.”
Several observers don’t see a rate cut in the offing today, but, as Mr. Pollick pointed out, there’s more on tap, notably fresh projections from the individual members of the Fed’s policy-setting panel, the Federal Open Market Committee.
“Although a rate cut could come as early as [this] week, we judge the FOMC will wait until we get past the June 28-29 G20 meeting (for a glimpse at the state of U.S./China relations) and also a clearer picture of Q2 growth,” said Bank of Montreal deputy chief economist Michael Gregory.
“Advance estimates will be released July 26, well in time for the July 30-31 FOMC meeting.”
BMO expects a July rate cut, while Mr. Pollick’s CIBC expects one in the fourth quarter, followed by another in the first three months of 2020.
CMC Markets chief analyst Michael Hewson agreed that today is likely to mark “a pivotal moment” where U.S. rate expectations are concerned.
“The foreign exchange market and the bond markets appear to be offering different perceptions of what the Fed might do [today], and, in this context, it won’t be what the Fed does that is important, it will be what the Fed says with respect to guidance on future monetary policy,” Mr. Hewson added.
“If [foreign exchange] markets are correct, the rise in the U.S. dollar suggest that the Fed won’t be anywhere near as dovish as investors expect, while bond markets appear to be pricing in the prospect of at least two rate cuts this year, with the first one as soon as July.”
Eric Lascelles, chief economist at RBC Global Asset Management, is also in the market-is-betting-on-too-much camp.
“To a significant extent, financial markets are trying to push the Fed into a rate cut,” Mr. Lascelles said.
“This is what makes the coming decision so sensitive,” he added.
“The tail should not be wagging the dog. Unless the Fed is fully committed to a rate decrease in July, it needs to try and pull back on market expectation at this meeting so as to avoid a massive disappointment for the market in July should no cut prove appropriate.”
Which puts the central bank in an interesting spot today.
“The Fed would likely be more comfortable with the market pricing 40 per cent to 60 per cent of a cut for July, rather than the 80 per cent currently priced,” Mr. Lascelles said.
“This will be a tricky thing to achieve, as the Fed must simultaneously acknowledge a worse trade environment.”