The Federal Open Market Committee has a mandate to promote full employment and keep inflation in check. It raises interest rates when the economy is overheating, and it lowers rates to promote spending or increase economic activity. Lately, Fed Chair Jerome Powell has taken a dovish or more accommodative stance. Many economists expect a 25-basis point rate cut after Wednesday’s FOMC meeting concludes. This could be one of the most critical meetings in years.
Recent data from the labor department reported far more jobs were created than expected. Retail sales were much better than anticipated, and CPI (consumer price index) was a tad higher than consensus estimates. Also, this past Thursday’s durable goods report was far better than expected. This does not sound like an economy that is contracting; in fact it is quite the opposite. So, why should the Fed lower rates?
The committee must see something down the road that will put a drag on the U.S. economy. It widely thought that the tariffs will eventually have a big impact and slow spending to a trickle. Thus, if the Fed lowers the Fed Funds rate on Wednesday, it is being preemptive, which is not its directive.
It is for this reason that Powell’s press conference (2:30 p.m. ET, July 31) may be groundbreaking. Not long ago, Powell hinted that the Fed would be data dependent and not make any policy changes until more data were available. Well, apparently that is not the case. A rate cut is expected, and I don’t think it is completely clear why. The Fed may have information that foretells a decline in economic activity soon. Let’s hope this will be clarified next week. I don’t believe the Fed has changed its mandate, but we may hear differently on Wednesday.
A rate cut of 25 bps is anticipated and should have no big impact on stocks or bonds. No move at all would indicate that the economy is in fine shape and more data are needed. In this case, stocks and bonds would likely fall.
In addition to the FOMC meeting, we also get the employment on Friday. Next week could set the tone for the rest of the year.
Senior Futures Instructor
Market Taker Mentoring, Inc.