If the Federal Reserve follows through strong hints that it will cut interest rates by the end of July, it will do so against a powerful consumer, a record-traded stock market and an increasingly difficult issue for simpler monetary policy.
Justifying a political relief against that kind of backdrop can be difficult for the Fed, although markets fully expect a cut this month plus maybe two more before the end of the year. The central bank is normally not in the industry to look into an economy that shows few signs of a recession, and generally keeps fire to more pronounced signs of decline is in sight.
But this is not a common time in the world of monetary policy, and the Fed is likely to follow in despite the solid economic signals.
"It doesn't exactly smell in terms of the strength of the financial data," said Chis Rupkey, CFO of MUFG Union Bank. "The consumer is back in a big way. You really have to ask yourself why they should cut prices."
In fact, the latest data points show solid consumers, which accounted for 67.4% of economic activity in the first quarter.
Retail sales rose 0.4% in June, according to the trade department figures which easily peaked at 0.1[ads1]% expected profit. On an annual basis, expenses increased by 3.4%.
"This really takes the cake as to how strong the consumer is," Rupkey said. "The Fed has its history and they hold on to it. So despite the data, despite the strong job figures, they think this is an insurance downturn. Risk management is needed for two factors: one is the slower global economy, and No. 2 is the fact that inflation has been below 2% target for so long. Given these two factors, I expect them to go. If not, you'll hear a lot of ruckus out of the White House. " 19659002] Fed Mayor Jerome Powell, in a speech Tuesday, outlined a laundry list of officials related issues.
Along with the usual suspects – the slower global economy and back and forth trade dispute between the United States and China – he also cited congressional debt bargaining, a potentially messy Brexit and Fed's nagging inability to bring inflation up to 2% target level like that feels healthy in a growing economy.
Fed Speakers Pointing to Cut
The chairman repeated his intention to "act as appropriate for whispering in the expansion," a sentence seen in the markets as a code for an impending rate cut.
His comments were echoed by other officials.
Chicago Fed President Charles Evans, in a CNBC interview on Tuesday, cited inflation as his main concern that opens up for "a few" price fluctuations before the turn of the year, as he said, is still not enough for the central bank to reach its goals . Dallas President Robert Kaplan told the Wall Street Journal that falling government bond yields send a market signal to the Fed that the fund's interest rate, currently in a range of 2.25% to 2.5%, may be too high.
So while a 25 basis point cut at the end of the month seems backed in the pie at this point, an aggressive relief cycle ahead will counter the Fed officials' assessment of an otherwise strong economy led by a resilient consumer.
By Federal Federal Open Market Committee meeting, appointed members repeatedly "solid" prospects for personal consumption expenditure, according to minutes released last week. The key to markets, however, was a passage in the meeting mix that officials said "agreed that risks and uncertainties surrounding the economic outlook had intensified and many condemned that further political accommodation would be justified if they continued to weigh on the economic outlook."
While the market is seeing much lower prices going forward, the economists remain divided.
- Curt Long, chief economist at the National Association of Federally-Insured Credit Unions, said consumers are "resilient" and, while the quarter is cut, seems to be inevitable, "it's not yet a convincing case for further relief this year . "
- Citigroup economist Veronica Clark said that the last scary of economic data indicates "fewer disadvantages for the prospect than just a month ago" to make "a modest quarter point cut" the most likely scenario. "
- Andrew Hunter, Senior US economist at Capital Economics, remains of the prospect of the Fed eventually having to ease the aggr, but believes that half-point expectations in July "look good from the mark."
Nevertheless, the Fed will continue to gain pressure from both markets and from an ever-impatient White House, where the preference for a weaker dollar is in line with Fed's renewed emphasis on inflationary competition.
Joe LaVorgna, economics for the US economy for Natixis, said it is actually a good thing The case for a half-point cut this month, based solely on the Fed needs to fix a reverse yield curve, which means that short-term interest rates are now higher than long-term.
The average in The version of the Fed Fund and the 10-year Treasury was 31 basis points in June, which means he has to do more to correct the current inversion, "LaVorgna said in a note.
"If the Fed surprises, it will be in the direction of more relief than no one," he added.