FOMC Leaves Rates Unchanged, but Sends a Dovish Signal to Markets

Gary Pzegeo, CFA
June 19, 2019

Market anticipation for easier Fed policy has been building since April to the point where futures for short term interest rates implied two interest rate cuts by the end of this year.

Market anticipation for easier Fed policy has been building since April to the point where futures for short term interest rates implied two interest rate cuts by the end of this year. So, when the Fed announced no interest rate cut and the median Fed voter projected there would be no cuts in 2019, it would be normal to expect some letdown in market prices. The Fed has been reluctant to give into interest rate market demands for a cut based on decent, albeit decelerating economic growth and an uncertain outcome for trade policy. At the same time, the Fed may want to avoid disappointing markets and suffering a repeat of the financial market revolt in the closing months of 2018. With its recent meeting the Fed appears to have stuck the landing. There was no change in rates, but the underlying detail of Committee member projections was more accommodative than expected.

Here is a summary of the Fed’s release:

Growth & Inflation

The pace of growth was downgraded to “moderate” based on soft business investment. The statement noted a reduction in market-based measures of inflation compensation. At the time of the May 1 meeting, the 10-year market implied rate of inflation was 1.94% versus 1.68% as of June 19.

Forward Guidance

The Fed has characterized its approach as “patient” for several months to let markets know that it was uncertain about the future direction for rates and required more information. This release excluded any reference to patience and instead stated that the Fed would look to do whatever was appropriate to sustain the expansion. The “dot plot” revealed no change in the median projected rate for 2019, but seven of the 17 voters expect two rate cuts will be required. The average projection was lower by 0.32% since the Fed last released data in March.

Implementation

There was no change in rates. One member of the FOMC dissented with the committee. James Bullard preferred an immediate 0.25% cut in rates in the first dissent of Powell’s chairmanship.

Treasury and equity markets rallied and the Dollar depreciated against major currencies following the release.

Gary Pzegeo joined the firm in 2007 as head of fixed income, focusing on portfolio management, trading, policy formulation and client service.