The U.S Federal Reserve is holding rates steady at a range between 2.25-2.5 percent. The scheduled announcement comes after the conclusion of the two day policy setting Federal Reserve Board of Governors meeting.
The Central Bank has changed its tone. It is signalling its prepared to cut rates if that is what is needed to protect the U.S. economy from trade conflict and other global threats. The focus remains on the U.S and China’s trade relationship.
In a statement issued after the announcement the U.S Fed said uncertainty in the economy has increased and it was willing to “act as appropriate to sustain the expansion.” Notably the bank has removed a reference it previously used in its statement to being “patient” when it comes to adjusting rates.
U.S. President Donald Trump has been vocal about wanting the U.S. Fed to cut rates. In the past, referring to the Bank as “gone crazy,” when it raised rates in late 2018.
It was recently revealed that Trump’s possible pick for an open seat on the Federal Reserve board is Judy Shelton. She reportedly told the Washington Post that she “would lower rates as fast, as efficiently, as expeditiously as possible.” She also hinted she would like to see rates near zero.
After the Fed’s announcement to hold rates stock markets rallied on the news. Lower rates are generally good for stocks and bad for bonds. The bond market in response to the news did dip lower.
All eyes now remain on the rest of 2019.
A survey of the 17 Fed officials showed that nearly half now expect at least one rate cut this year, with seven projecting two. This is in stark contrast to when they met in March. At that time no officials had forecast a rate cut for this year.
The Fed is meeting at a time when the U.S.-China trade war is heating up. There threats of tariffs and counter-tariffs on each other’s products. This has magnified concern and uncertainty for businesses and investors. Also how much the economy will suffer.
The U.S Manufacturing sector is particularly vulnerable to these trade wars. This week U.S. manufacturing data showed activity has plunged this month into negative territory and to its lowest point since 2016.
BMO Deputy Chief Economist, Michael Gregory, CFA, says the bottom line is the Fed is waiting for more information on trade with China. He says, .”given our pessimism about a U.S./China trade deal getting done, and our judgement that the odds favour some expansion of tariffs on Chinese goods, we’ve been calling for a rate cut next month.”
If that is the case that would put extraordinary pressure on the Bank of Canada to do the same. The Bank of Canada’s next interest rate announcement is scheduled for July 10th.