- The Federal Reserve’s FOMC meeting is scheduled for July 30–31.
- The Fed is widely expected to cut rates by 25 basis points.
Federal Reserve meeting
The Federal Reserve’s FOMC meeting is slated for July 30–31. Though it’s also earnings season, the meeting is bound to garner attention. The Fed abruptly halted its rate hikes earlier this year. Since then, Fed chair Jerome Powell has signaled that the central bank is amenable to a rate cut.
So what should we expect from the Fed’s meeting? Let’s look at the different factors that could influence the Fed’s decision-making process. We’ll also explore whether the US economy really needs a rate cut. Let’s begin by looking at a timeline of the Fed’s previous policy decisions.
Fed’s policy rates
The Fed kept benchmark interest rates zero lower bound for almost seven years. The benchmark interest rate remained between 0%–0.25% between December 2008 and December 2015. US President Donald Trump, who now advocates lower rates, previously lashed out at the Fed for keeping rates too low. About previous Chair Janet Yellen and interest rates, Trump said, “Well, it’s staying at zero because she’s obviously political. She’s doing what Obama wants her to do.” Trump added, “I believe it’s a false market because money is essentially free.”
Incidentally, earlier this year, Yellen said that she doesn’t see the yield curve inversion as a sign of a recession. She added, “In contrast to times past, there’s a tendency now for the yield curve to be very flat.” However, Yellen saw the yield curve inversion as an indicator that the markets foresee a rate cut. Yellen said, “And in fact it might signal that the Fed would at some point need to cut rates.” Now, before the Fed’s meeting, Yellen has called for a rate cut amid global uncertainty. According to Yellen, “I think in light of the risks, I would be inclined to cut a bit.”
Fed started hiking in 2015
The Fed finally bit the bullet and raised rates by 25 basis points in December 2015. That was the first rate hike since June 2006. Incidentally, it was Yellen who initiated the Fed’s tightening cycle. Trump’s new chair appointee, Jerome Powell, continued with the rate hikes and raised rates four times last year, much to Trump’s displeasure. Powell continued with the rate hikes in the fourth quarter of 2018 despite the sharp fall in the markets. The S&P 500 (SPY) fell sharply in the fourth quarter. However, SPY rose to a record high earlier this month.
High-flying FAANG stocks Facebook (FB), Apple (AAPL), Amazon (AMZN), Netflix, and Alphabet (GOOG) also plummeted in the fourth quarter. Earlier this month, executives from Apple, Amazon, Alphabet, and Facebook testified before lawmakers in an antitrust investigation. The European Union has also initiated an antitrust probe against Amazon. President Trump recently called for a revisit of the JEDI contract, for which Amazon is seen as the frontrunner. Microsoft (MSFT) is the other company in the running for the prestigious $10 billion contract. Trump mentioned Oracle (ORCL), Microsoft, and IBM (IBM) as companies with complaints against the JEDI contract. Oracle and IBM have seen upward price action of 30.1% and 36.3%, respectively, so far in 2019 based on their July 26 closing prices.
Expectations from the Fed meeting
Before the Fed meeting, the markets are putting a 100% probability on a 25-basis-point rate cut. It’s worth noting that the Fed often tends to surprise markets. Before the Fed’s January meeting, the markets were expecting it to hike rates. However, the Fed surprised the markets by abruptly ending its rate hike cycle. Even though the Fed halted its rate hikes, Trump has continued to lash out at Powell. Trump wants the Fed to cut rates to boost the US economy. While Trump sees the current US economy as the best it’s been in decades, he’s advocated easing from the central bank. Trump also sees rate cuts as necessary to win the trade war.
But does the US economy really need rate cuts? We’ll explore this question in the next article.