Fed’s upcoming rate cut is likely to be preemptive rather than a response to recession
World stock markets rose on Thursday after the Fed signaled about intentions to cut rates, presumably at the next meeting, removing the “patience” wording from the statement, emphasising the growth of uncertainty in forecasts. Updated dot plot showed that more and more officials are inclined to lower rates at the next meetings.
The MSCI index, a replicating portfolio of stocks from 47 countries, grew by 0.4%, expecting a fresh batch of stimulus from the world’s major securities, intending to close the third trading session in positive territory. The Asian MSCI index rose by 1.2% due to the rise in the stock market of China.
Despite the lack of direct hints at a rate cut in July, futures on the federal funds rate assessed the chances of keeping the rate at the current level of 0%. The main expected outcome of the July meeting is the new range of rates of 2-2.25% (a decrease of 25 bp), with chances of 67.7%.
The long-term interest rate forecast fell from 2.75% to 2.5%. It is also noteworthy that the forecasts for GDP and inflation (staff economic projections) have changed in different directions. The Fed expects that GDP in 2019 will grow by 2.0% (+ 0.1% compared with the previous forecast), while inflation will slow to 1.5% (-0.3%). A relatively positive outlook for the economy may indicate that the potential rate cut would be preemptive, rather than a response to the approaching recession, which created a relatively safe opportunity to push stock indices up to new highs. Futures on the S&P 500 during the trading session on Thursday updated the maximum and are 42 points from 3000 points round mark.
Next week, the S&P 500 will most likely overcome the 3000 mark, since the deadlock in the US and China talks is most likely priced in expectations, and the next piece of important data on the US economy will arrive only early next month.
It is necessary to recognise that the factor of synchronous actions of world central banks cannot be underestimated. Therefore, yesterday’s article in support of the views of Goldman, which predicted the extension of the neutral position of the Fed, turned out to be insufficiently substantiated speculation. By the way Goldman ditched its call for the Fed’s “on hold” stance, now expecting rate cuts in 2019.
In the meantime, the probability of a recession, according to the New York Fed Recession Model, increased to 30%, almost the necessary level to historically substantiate the approach of the next crisis: