20 Jun 2019

FOMC holds rates steady

Overnight, the US Federal Open Market Committee (FOMC) voted 9-1 to maintain the Federal funds target rate range at 2.25-2.50%.



Dissenting against the decision was St. Louis Fed President James Bullard, who favoured an immediate 25bp cut. But this was accompanied by a more dovish policy statement, with the FOMC dropping the reference to the Fed being “patient” to instead state that it would “act as appropriate to sustain the expansion”. Reinforcing this message was the evolution in the ‘dot plot’. While the median view on the FOMC is that steady rates in 2019 are ‘appropriate’, for 2020 the consensus has shifted in favour of 25bp cut in mirror contrast to the hike previously indicated. Policymakers were also split down the middle in their projections; eight judged at least one rate cut will be needed this year, while another eight saw no change in rates and one expected a rate hike.


July cut in the bag 

It was evident that the US-China trade dispute was the key determinant of the path for rates, with Fed Chair Jerome Powell signalling in his press conference that the FOMC was seemingly prepared to cut rates as early as next month in the absence of a near-term de-escalation in tensions.


Markets have taken the dovish policy announcement as a further sign that the Fed is set to ease policy this year; Fed funds futures have rallied, the 10-year Treasury yield has fallen below 2% for the first time since 2016 and the S&P 500 ended the day 0.3% higher and the dollar is lower across the board. Given the dovish extent of the policy decision and the fact that markets are now fully pricing in a 0.25% rate cut at the July meeting, we have put our forecasts for the Federal funds target rate range under review.


Tory leadership update

Boris Johnson further cemented his prospects of entering 10 Downing Street, as he received 143 of the 313 Conservative Party MPs’ votes in the contest’s third round yesterday. Rory Stewart came last with 27 and was eliminated. This means that BoJo goes into today’s fourth round with Jeremy Hunt (who came second with 54 votes), Michael Gove (51) and Sajid Javid (38). A fifth round is also scheduled later on today. Hence the final two, who enter a run-off among party members, will be known this evening. BoJo is now 1/8 favourite to become the next leader.  


Bank of Japan keeps policy on hold

The BOJ kept its policy rate and asset purchase levels unchanged just hours after the Fed signalled that it could cut rates. BOJ maintained its short-term target at -0.1% and a pledge to guide 10-year government bond yields around zero percent. It also kept intact a loose pledge to keep buying government bonds so the balance of its holdings increase by roughly 80 trillion yen ($738 billion) per year. BoJ is likely to shift more dovish in the coming months given the current global economic outlook is beginning to darken. Rate cuts by the Fed could force the BoJ to follow suit as holding steady could firm the JPY to levels that the BoJ may find uncomfortable.


Economic Releases

09.30 UK Retail Sales
12.00 UK BoE Interest Rate Decision
12.00 UK BoE MPC meeting minutes
13.30 US Philadelphia Fed Manufacturing Index
21.00 UK BoE Gov Carney speaks