Clamoring for a rate cut — the first in more than a decade — by the Federal Reserve at some point this year is running hot.
A survey by the Wall Street Journal earlier in the week signaled that nearly 40% of economists (paywall) polled by the publication expect the U.S. central bank to ease monetary policy next month.
The chief economist Joe Davis of Vanguard, the fund provider that manages some $5.4 trillion of wealth, speculated that an “insurance” rate cut by Jerome Powell’s Fed could arrive as early as Wednesday, at the conclusion of the central bank’s two-day policy gathering that kicks off June 18. Federal-funds futures pointed to an 87% chance for a July cut and 26% chance for an easing this month, as of late Friday, CME Group data show.
But what if Wall Street is stone-cold wrong about the Fed cutting, or even communicating its intent to reduce benchmarks rates, which currently stand a range between 2.25%-2.50%, in coming meetings?
Kathy Bostjancic, chief U.S. financial economist at Oxford Economics, told MarketWatch that the domestic economy hasn’t weakened sufficiently to justify dialing back rates.
“The Fed might not be prepared to confirm such validations given the hard data do not yet signal a sharp slowdown in economic activity,” she said.
May’s woeful employment report from the Labor Department, with just 75,000 jobs created on the month, compared with expectations for 185,000, is often cited as evidence of cracks forming in the economy, which is set to mark at the end of this month a record for the length.
However, other data have been relatively healthy if failing to dazzle. A measure of retail sales activity indicated that persistent talk of the demise of the U.S. consumer is overstated. U.S. retail sales gauged by the Commerce Departmentincreased 0.5% in May, slightly below expectations of 0.7%, while the reading for April sales was raised to a 0.3% gain from the initial report of a 0.2% fall.
The University of Michigan’s consumer-sentiment index came in at 97.9 in early June, down from a seasonally adjusted 100 in May but slightly higher than estimates for 97.3, and a measure of industrial production rose 0.4% in May, representing its strongest monthly rise in six months, helped by increased production of pickup trucks and cars.
Those reports don’t immediately scream out for a pre-emptive rate cut, some strategists argue.
However, the data do pose a conundrum for the Fed, which must weigh lowering rates—off already low levels—to curtail the effect of a protracted Sino-American trade conflict even as data remain relatively stable—at least for now. To be sure, the corporate chieftains say trade-war worries are forcing them to rethink their business strategies.
That all sets the stage for a possible disappointment for a market that is pining for rate cuts, betting that the trade friction between the U.S. and China could yield a more dovish, or accommodative, posture from U.S. monetary policy makers, with the 10-year Treasury note TMUBMUSD10Y, +0.21% closing at a paltry 2.093% on Friday, while the S&P 500 SPX, +0.17% is off a mere 2% from its April 30 record and the Dow Jones Industrial Average DJIA, +0.12% is about 2.8% shy of its Oct. 3 all-time high, while the Nasdaq Composite indexes COMP, +0.70% was about 4.5% off its 52-week high. That is notable because the Nasdaq slipped into correction territory, commonly defined as a 10% drop from a recent peak, about two weeks ago...
- Source, Market Watch, read more here
