The Federal Reserve is widely expected to cut the key borrowing rate at its meeting on July 30. The July cut is certain if there is a disappointment in payrolls data or delay in imposition of additional tariffs. However, the rate of change is widely expected to vary from a 50 basis point to 75 basis point for the whole of the year.
The Cleveland Fed President Loretta Mester said the interest-rate cuts only needed if more bad economic data comes. This has been hinted by the recent mixed economic data that suggested there is a certain chance of the economy stumbling. Her baseline forecast calls for slower, but still solid, growth of around 2% in 2019 despite rising downside risks.
Mester is not in favor of lowering interest rates due to lower inflation readings seen over the past few months. She expects inflation to return towards 2% over the next couple of years.
The markets may have been putting too much weight on President Donald Trump’s monetary policy wish list, rather than on what the Fed is actually saying. St. Louis Fed’s President James Brian Bullard pushed back against talk of 50 basis-point cuts this year and that would suffice to keep the big ship America on course, according to the brokerage firm CIBC Capital Markets.
CIBC expects the upside surprise in payrolls on Friday could still be enough to stay the Fed’s hand for a while. However, a disappointment on either payrolls data or delay in the imposition of additional tariffs would cement the case for a July cut.
Meanwhile, research firm Capital Economics expects a further slowdown in economic growth to eventually prompt the Fed to cut interest rates by a cumulative 75 basis-point, particularly with underlying inflation muted. But it is hard to see that happening before the September FOMC meeting, even though markets have begun to price in a cut by July.
Capital Economics expects GDP growth to slow from 2.3% this year to 1.2% in 2020 before looser financial conditions prompt recovery to 2% in 2021. A report from payroll processor ADP showed private sector job growth reaccelerated in June, improving by 102,000 jobs after rising 41,000 jobs in May. The firm believes the slowdown in employment growth should still be enough to persuade the Fed to cut rates in either July or September.