As widely expected the Federal Reserve held interest rates steady for a third straight meeting and emphasized they see a growing risk of both higher inflation and rising unemployment, stating “uncertainty about the economic outlook has increased further.”
The statement is not a surprise as the President’s trade policy has unleashed a wave of uncertainty across the economy with most economists expecting the expansive tariffs will boost inflation and weigh on growth.
Most also believe that the Committee is determined to keep tariffs from sparking a persistent rise in inflation and several officials have signaled they would not support lowering interest rates preemptively to protect the economy against a slowing economy and to reduce the odds of inflationary expectations becoming further unanchored if such reductions take place.
Recent data stated that year ahead inflation expectations are the highest since 1981 and 5-to-10-year inflation expectations are the highest since 1991, a horrific spot given the $37 trillion debt. [A large component of long-term interest rates are inflationary expectations]
An obvious conclusion to make is that the Fed [and the economy] is in a difficult spot…the Central Bank is worried about rising inflation and rising unemployment.
The tariff situation is extremely fluid and unpredictable; thus, it is believed that the Fed would be irresponsible to be responsive as the situation can change drastically and dramatically on a moment’s notice and their actions could lack the intended impact or worse compound a detrimental effect.
The Treasury market was relatively unmoved by the outcome. Fed Funds’ futures are suggesting at least three interest rate cuts with the first cut fully priced in by September.
Today there is the auction of the 30-year Treasury. What will be the demand? The last auction demand was “weak,” a surprise given that there was “robust” demand for the 10-year auction the day before. Will history repeat itself?
Led by GOOG, the NASDAQ and the S & P 500 were about 0.5% lower but had a late-day rally to close nominally higher. The Dow closed 0.70% higher. The decline accelerated around the time of the post meeting statement, but this acceleration may have been linked to a statement from the President that he would not preemptively lower tariffs to jump start talks.
What will happen today?
Last night the foreign markets were up. London was up 0.38%, Paris up 1.11% and Frankfurt up1.14%. China was up 0.28%, Japan up 0.41% and Hang Seng up 0.37%.
Dow and NASDAQ futures are up 1% and 1.5%, respectively, as a “comprehensive trade deal” has been made with England. The 10-year is off 12/32 to yield 4.32%
