Fed Rate Cut Talking Points:
- The FOMC cut its main interest rate today from 2.25-2.50% to 2.00-2.25%; rates markets were pricing in a 100% chance of a 25-bps today and an 18% chance of a 50-bps cut.
- The July Fed meeting also revealed that the FOMC will cease the winding down of the balance sheet on August 1 – effectively ending what was known as “qualitative tightening,” or QT.
- The Fed’s policy statement made clear that it will continue to monitor external risks, essentially saying that if the US-China trade war rages, the FOMC will be in easing mode.
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The Federal Reserve has answered market participants’ calls for more dovish policy. The July Fed meeting officially marks the end of the rate hike cycle that began in December 2015, with the first of potentially several 25-bps rate cuts coming down the pipeline today. The FOMC cut its main interest rate today from 2.25-2.50% to 2.00-2.25%; rates markets were pricing in a 1000% chance of a 25-bps today and an 18% chance of a 50-bps cut.
US-China Trade War on Powell’s Mind
The Fed’s policy statement made clear that it will continue to monitor external risks, essentially saying that if the US-China trade war rages, the FOMC will be in easing mode. “This action supports the Committee’s view that sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective are the most likely outcomes, but uncertainties about this outlook remain.
“This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.” International developments don’t only mean the US-China trade war: concerns about global energy supplies given geopolitical tensions around Iran and the Strait of Hormuz; and who can forget about Brexit?
The July Fed meeting also revealed that the FOMC will cease the winding down of the balance sheet on August 1 – effectively ending what was known as ‘qualitative tightening,’ or QT.
Not a Unanimous Decision
Voting for the 25-bps rate cut today were Fed Chair Powell, Fed Vice Chair Williams, and board members Bowman, Brainard, Bullard, Clarida, Evans, and Quarles. Voting against the action were George and Rosengren, who preferred to keep rates on hold. This voting breakdown is helping inform market participants that their expectations for a 50-bps rate cut were overblown; the dissenters didn’t want to cut at all.
In turn, the voting breakdown suggests that the FOMC isn’t as dovish as previously thought. In response, interest rate markets have started to discount lower odds of additional rate cuts in 2019. To wit: prior to the July Fed meeting, there was a 76% chance of a second 25-bps rate cut in September and a 56% chance of a third 25-bps rate cut in December; after the July Fed meeting, there is a 67% chance of a second 25-bps rate cut in September and a 50% chance of a third 25-bps rate cut in December.
As we’ve been pointing out for several weeks (including most recently, yesterday), receding Fed rate cut odds are helpful for the US Dollar (via the DXY Index). Today, with rate cut odds taking a step back, the US Dollar has been able to rally to fresh yearly highs.
DXY INDEX TECHNICAL ANALYSIS: DAILY PRICE CHART (APRIL TO JULY 2019) (CHART 1)
Following the July Fed meeting, the US Dollar rallied to a fresh yearly high, with the DXY Index eclipsing the May high set at 98.37, establishing a new high year-to-date at 98.42. A close at 98.42 or above would not only represent the highest close of the year, but it would come alongside a move back above the rising trendline from the February 2018 and March 2019 lows in the form of a bullish outside engulfing bar candle.
Fed Chair Jerome Powell's press conference begins at 14:30 EDT/18:30 GMT. Follow along in real-time in the DailyFX Real Time News feed.
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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher, email him at firstname.lastname@example.org