The Federal Open Market Committee (FOMC) - the voting arm on monetary policy - and the leadership of the Federal Reserve is scheduled to meet on June 18 and 19 to determine the course of monetary policy. Chairman Powell and his colleagues have made it clear that they want to cut rates preemptively - ahead of a recession - to shore up confidence and offset some of the headwinds tied to an increase in tariffs. Inflation and wages have also begun to cool, which is the opposite of what the Fed has hoped and expected for this late stage of an expansion. In June, we tied the 1990s boom, which had been the longest of the post WWII era, in duration if not strength.
Financial markets are putting the probability of a rate cut in June at little more than a 20% for a rate. That probably spikes to 80% for a rate cut in July. My own preference is that the Fed cuts rates in June to control the narrative on its forecast, which is expected to drop. Voting member Jim Bullard of the Saint Louis Fed has already staked out his ground; he believes that the Fed needs to cut and will likely dissent at the June meeting if the Fed waits until July. That coupled with a new set of forecasts by the Fed, which will reveal a bias to cut rates could fuel confusion instead of clarity in financial markets if the Fed waits until July.
Julia Coronado of Macro Policy Perspectives raised an excellent suggestion at the FedListens event in Chicago last week. Her suggestion is to delay the release of the Fed’s “dot plot,” which provides individual expectations for rate cuts. three weeks to coincide with the minutes of the FOMC meeting. That would provide Fed watchers, market participants and financial reporters a context for understanding what the FOMC members are thinking. The minutes to the meeting reveal how risks to the economy were being evaluated by individual members at that point in time and give a much better sense of how the overall leadership of the Fed is leaning. I think that it is possible later this year as Fed communications evolve, but that cannot occur in time for this meeting.
The FOMC statement will underscore the cooling in the economy, the labor market and inflation since the Fed last met in May. The statement will have to drop the term “patience” when referring to the trajectory on rates, as they now have embraced a near-term rate cut. There is no need for the statement to retain the word “patience” with regard to shifts in rates as it is now clear that it is willing to cut short-term interest rates. In fact, their forecast is now contingent on a preemptive cut in rates. That is a long way from where the Fed was last December, when it still expected two rate hikes.
The Fed is also expected to address its balance sheet. The Fed has already said it will halt reductions in its balance sheet by September. Chairman Powell made clear when he spoke at the FedListens conference in Chicago that the Fed now considers changes in its balance sheet via increased Treasury bond purchases as conventional instead of unconventional tools in their tool kit. That means they need to convey that shift and willingness to pull the trigger on Treasury bond purchases when the economy falters.
The Federal Reserve is ready to cut short-term interest rates to avert a potential recession linked to the reality and threats of escalating tariffs. I think a June cut is probable. This would give the Fed more latitude to control its messaging. A July cut would not change the overall outlook much, given the time it takes changes in interest rates to work their way through the economy, but would squander a chance for the Fed to control the narrative. A June cut would also reduce the risk that we all get sideswiped by a negative news shock in the interim. We are one tweet away from a further escalation in tariffs.
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