GENERALLY SPEAKING THE FED DID WHAT ALL THOUGHT IT WAS GOING TO DO

The Federal Reserve left borrowing costs unchanged and signaled an openness to future cuts based upon trade and economic activity.   There was one dissent, voting to move the target range to 2.00% to 2.25%.    Seven members predicted interest rates will be lowered by year end.  (There are 17 members)

As widely known, expectations for the FOMC to lower interest rates increased dramatically after trade negotiations between the US and China stalled in May.

The Committee stated “in light of these uncertainties and muted inflation pressures, the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion.”

At the time of this writing, the probability of a July reduction is about 83% according to fed funds futures contracts.

In my view the Committee did not state it will reduce rates but will instead continue to monitor the situation.  At this juncture unless the trade war with China intensifies dramatically, based upon current conditions expressed by the Fed, I believe the case for easing is weak.  Furthermore I think if the Committee did not acknowledge potential weakness, markets would have been crushed.

Unlike the May meeting, the FOMC did not lower the interest rate on excess bank reserves.

I ask rhetorically, what happens if there is a trade deal?  Will such cause yet another change in monetary policy expectations?

Markets had a nominally positive response to the outcome for such was largely expected.

Last night the foreign markets were up.  London was up 0.59%, Paris up 0.59% and Frankfurt up 0.82%.  China was up 2.38%, Japan up 0.60%  and Hang Sang up 1.23%.

The Dow should open moderately higher on the contradiction between lower interest rates, higher oil and trade optimism.  The 10-year traded to the lowest yield since November 2016, a decline no one six months ago remotely thought was to occur.  Oil is surging because of regional tensions, tensions which are not remotely reflected in energy shares.  I ask will the oil complacency be shattered in many different dimensions?  And then there is trade.  If trade optimism continues to rise, is this not negative for interest rates?

The 10-year is up 7/32 to yield 2.0%.

 

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