The Fed Holds Rates
We weigh in on today’s Fed decision, and what it means going forward
Today came word that the Fed held rates, maintaining the target 2.25% – 2.50% range.
Importantly, it signaled that it’s ready to cut rates in the future if the U.S. economy shows signs of weakness.
While this decision was largely expected, what wasn’t as anticipated was how split the voting members are looking forward.
Eight of the 17 FOMC members are forecasting a 0.25% cut this year. Seven of these members are forecasting two 0.25% interest rate cuts in 2019. One official projected the Fed would need to raise interest rates this year. The remaining eight suggesting rates would stay unchanged.
One undeniably dovish aspect of today’s meeting was the removal of the word “patient” in the Fed’s commentary. This is important as it does signal the Fed’s willingness to cut rates as the year progresses.
A bit lower in this issue, we’ll establish more context for today’s rate decision and provide additional details. But for now, let’s jump straight to today’s takeaway, and more importantly, what it means for your wealth.
For that, we’ll turn to our analysts. You see, here at InvestorPlace, we’re proud to feature some of the most intelligent, respected, successful pros in the industry. So, let’s see how they’re interpreting today’s decision.
***We’ll start with with Matt McCall, editor of , who has a particularly short-and-sweet, bullish take on today
The market was expecting today’s decision. And the reason stocks keep rallying is because the hope of a rate cut in the next 6 months is still alive and well.
There is a Fed “put” under the market and the 2nd half of the year should see more gains.
Get long, stay long.
***Next, let’s turn to Louis Navellier, editor of , who also has a bullish take
The highly anticipated Federal Open Market Committee (FOMC) statement is out, and it was a particularly positive one for the stock market. Here’s a quick breakdown of the release:
1. The word “patient” was removed. This is very positive, as it means that the Fed is no longer on “hold.”
2. The addition of “to act as appropriate” and “uncertainties about the economic outlook have increased” is also very positive. This sets up the potential for a key interest rate hike in July if inflation remains soft.
3. “Muted inflation pressures” and “business fixed investment have been soft” phrases are also positive.
Overall, a July or September interest rate cut is very likely, depending on inflation, of course. A second 0.25% interest rate cut also depends on the economic and inflation news.
***Next, we turn to John Jagerson and Wade Hansen from
John and Wade added an insightful commentary on what was behind today’s decision.
In my view, the Fed’s lukewarm stance today in favor of rate cuts was meant to assert its independence from President Trump and big bank traders (who have been pressuring the fed to cut rates). The Fed couldn’t have taken a stronger stance in favor of rate cuts because there was no data to support such action. If they looked like they had buckled to political pressure despite the data, investors could have reacted even more poorly. Today’s statement was an assertion of the Fed’s independence; that may frustrate some traders in the short-term, but it should be better in the long-run.
***Eric Fry of also sees today’s decision as strengthening the bullish case
Today’s FOMC statement signals game-over for fed tightening. The start of a new easing cycle has begun, whether the economy needs it or not.
Stocks are likely to benefit. Precious metals are likely to benefit even more.
***Finally, let’s turn to Neil George of who suggests what we might see going forward
The next FOMC decision will take place on July 31 and sets up the market for a reduction in the target range. In addition, it was noted that out of the 17 members polled informally — eight saw rate cuts as imminent this year. Eight saw no cuts needed at this time and only one saw the potential for a hike.
This is pretty good news for the stock and bond markets — particularly for interest rate sensitive stocks including REITs, utilities as well as corporate and municipal bonds.
***Let’s now back up and review how we got here
Going into today, the general consensus among analysts was that the Fed would not lower rates in this meeting. Yesterday, the odds of a cut came in at just 24%.
Several reasons were behind this view: one, the market held hope the U.S. and China could make progress on the trade war at the upcoming G-20 summit. If that happens, it will remove a major economic need for rate cuts. And indeed, yesterday’s news that Trump will meet with Xi at the G-20 was cheered, as Wall Street surged 353 points on the day.
Second, speculation was that the Fed didn’t want to appear overly influenced by Wall Street and Trump’s heckling. Trump has been a vocal critic of the Fed, claiming the market would be 10,000 points higher had the Fed not raised rates.
Third, the Fed wanted to avoid any drastic actions that would make last December’s fourth rate hike of 2018 appear like a policy mistake. A “slow arc” rate change is preferred to a sharp, needle-point pivot.
Given all this, most eyes were on next month for an actual reduction. As of yesterday, analysts put a July rate cut at almost 90%.
What’s interesting is of that nearly-90% expectation, 68% believed the cut would come as a quarter basis point – while nearly 21% believed it would be a half-point cut, down to the 1.75% – 2.00% range.
***So, if cuts weren’t expected in today’s meeting, what did the market want to see?
It was all about signaling.
First, the market wanted to hear softer language hinting at future rate cuts. Second, they wanted these cuts manifested as adjustments to the dot plot.
Let’s go over each …
As to language, what analysts were looking for was a tip toward “flexibility” instead of what we’ve heard up to this point, which has been the term “patient.”
The latter description is a throwback to the December meeting, when the Fed pushed the target range up to 2.25% to 2.50%. After that meeting, the Fed changed its stance and added that it would be “patient” as it watched economic developments.
As recently as its last policy meeting in early May, the Fed used the term. But Wall Street wanted a new word from today’s meeting — something akin to “flexibility.” In other words, traders wanted assurance that the Fed was willing to move forward with rate cuts.
Fortunately, they go it.
From the Fed’s statement today (bold added):
“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, with a strong labor market and inflation near its symmetric 2 percent objective.”
“Act as appropriate” is the signaling the market wanted.
The second part of today’s meeting that was in the spotlight was the dot plot.
If you’re less familiar with this, the dot plot is a chart that anonymously reflects each Fed official’s rate forecast. Fed policymakers provide their projections for where they expect rates to go. These projections are then charted on a so-called dot plot.
Below is March’s dot plot, the most recent prior to today.
Notice how there was a slight upward bias to anticipated rates back in March.
Leading into today, there was some uncertainty as to how the updated dot plot would appear since the Fed has never used this tool during an easing cycle (it was adopted in 2011). Given this, despite expectations for rate-cut signaling, just how it would appear visually was unclear.
We just found out …
Below is the most recent dot plot from today’s meeting. Notice the downward revisions compared to the March dot plot above. But also notice how it appears more scattered.
This scattered element reveals that policy makers are divided on interest rate moves for the remainder of this year.
***Wrapping up, the Fed has signaled it’s willing to cut rates if necessary … which should help support the market as 2019 continues
Though tariffs or some other unexpected macro event could derail market gains, for now, we’re cautiously optimistic that stocks have more room to climb. After all, if the Fed wants to keep the expansion happening, it’s generally wise to avoid taking the opposite side of that bet.
We’ll learn more next month when we find out whether or not the Fed follows through with expected cuts … and to what degree.
In the meantime, stay long.
Have a good evening,
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