FOMC Preview: IOER Cut Possible, but Neutral Outlook Likely for Another Month
Matt Weller, CFA, CMT April 30, 2019 5:55 PM
Last month, the Federal Reserve made a major shift toward neutral policy, with 11 of the 17 FOMC members anticipating no further interest rate changes this year (see “FOMC Recap: Doves on Parade!” for more). Against that backdrop, this month’s meeting is more likely to provide an update to how the central bank is viewing the US economy, rather than any immediate changes to monetary policy.
Looking at the data the central bank prioritizes, the outlook for the US economy is muddled. Domestic growth remains relatively strong, as last week’s Q1 GDP report showed (though that strong growth was driven heavily by temporary inventory buildup and a potentially unsustainable rise in external trade figures). Despite the unemployment rate approaching a 50-year low, inflation data remains subdued, with Core PCE, the Fed’s preferred inflation measure, dropping in each of the last 3 releases to just 1.6% y/y.
As we highlight above, traders are now pricing in a potential interest rate cut from the central bank by the time we flip the calendars to 2020, something that exactly 0 of the 17 FOMC members anticipate. This will be the major dynamic to watch: Will the Fed’s statement hint at the potential for a rate cut this year, or will the central bank maintain its generally neutral outlook for another month?
The FOMC’s Vice Chairman, Richard Clarida, noted on CNBC earlier this month that there is precedent for such an “insurance cut”; in both 1995 and 1998, the central bank reduced interest rates even without signs of a recession looming. That said, we believe the Fed will take a wait-and-see approach for another month, leaving its outlook generally neutral until the next round of economic forecasts in June.
As a partial nod to the recent subdued inflation figures, we wouldn’t be surprised to see the Fed reduce its IOER (interest on excess reserves) rate by 5bps (0.05%) to 2.35%. This would have the effect of pulling the effective Fed Funds rate down marginally, though it would be more of a technical adjustment than anything.
The market’s confidence in a rate cut later this year has grown in recent weeks, so another neutral statement could prompt traders to pare those bets slightly. If the release plays out as outlined above, we could see continued strength in the US dollar and a possible headwind for US indices.
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.