What’s the Fed’s Next Step on Rates?

Futures markets predict it will reduce another quarter-point this year, and that’s it.

Only one more, and we’re done. At least for 2019. This is the view of the futures markets on what a divided Federal Reserve will do up ahead, now that they sliced another quarter-point off the benchmark rate Wednesday, putting it in a range from 1.75% to 2%.

The Fed, which had been hiking the rate steadily since late 2015, reversed itself in July and added a second cut yesterday. Now, despite an overall healthy US economy (with manufacturing showing some signs of weakness), the rate cuts are justified as a prophylactic measure—due to fears about the US-China trade war and slowing economies elsewhere.

To Fed Chairman Jerome Powell, the Fed’s course is a moderate one that will serve the economy best. “We took this step to help keep the US economy strong in the face of some notable developments and to provide insurance against ongoing risks,” he told a news conference yesterday.

President Donald Trump, who wants much deeper cuts, was not pleased. After the Fed announcement, he took to Twitter, writing: “No ‘guts,’ no sense, no vision!”

The odds are the strongest, at 48%, that by year-end the range for the fed funds rate will drop just one more quarter-point to 1.5%-1.75%, according to the CME Group’s compilation. Meanwhile, 39% think the Fed’s policymaking body will stand pat at 1.75%-2% at the conclusion of 2019. A mere 13% believe that come December the rate will go down two notches from today’s level, to 1.25%-1.5%.

What happens in 2020? By the April 29 meeting next year, which is as far as the contracts go, the biggest bet (36%) is that the rate will be 1.5%-1.75%. But that’s far off, and a lot can happen in the interim.

How do the members of the Federal Open Market Committee, the central bank’s rate-setting arm, feel about the future? The answer is mixed, with the doves in a minority, albeit a strong one.

In the Fed’s so-called dot plots, where members anonymously place their own wishes for year-end, a majority is for staying put (five members) or hiking (five), with the rest (seven) wanting just one more quarter-point reduction.

No such fractiousness emerged in the vote for Wednesday’s action, though. Just three FOMC members dissented from the quarter-point cut decision. Boston Fed President Eric Rosengren and Kansas City Fed honcho Esther George were against the reduction, a repeat of their votes in the July meeting. They want to keep rates unchanged. St. Louis’ James Bullard voted against the quarter-point drop, preferring a half-point cut.

The big worry is that, whether they reduce a quarter- or a half-point more, the Fed will end up with less room to enact a meaningful rate drop to combat the next recession. And for now, most analyses, including that of the Fed, foresee no recession in the next few years. Here’s hoping they are right.

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