Three reasons the Fed will not cut rates at its June meeting

Everyone is convinced that the Fed will reduce interest rates this year, the central bank is faced with a rather pressing question: why wait?

After all, the market is already planning at least cuts this year and probably three. Although the Federal Open Market Committee is meeting next week, there is little expectation of change.

Not to move next week is essentially three factors, according to Fed observers: the imminent G-20 summit in which the United States and China could, at least theoretically, reach a trade agreement; a desire not to be perceived as being too influenced by the financial markets and the rumors of President Donald Trump; and the desire to avoid making the December rate hike a policy mistake.

"They do not want to be seen as under any pressure, be it from the White House or the market," said Lindsey Piegza, chief economist at Stifel. "The Fed will look at the data, it will look at what its models say, for them, no matter what the markets say."

Wall Street, however, claims a cut.

Futures prices Friday afternoon in the federal funds market showed a 21% probability of changing positions at the meeting of June 18 and 19, down 30% earlier in the day on data. stronger than expected. The likelihood of a reduction in July remained at 85%, while the market was expecting a 61% probability of three movements in total by the end of the year.

Currently, President Jerome Powell and his colleagues at the Fed say no movement is indicated. This is likely to change as FOMC members submit their economic projections at the June 18-19 meeting, which includes the "point chart" of each member's expectations of where the rates will be heading in the next few years.

"I can not imagine what they are going to do with the points," said Thursday Jeffrey Gundlach, founder of DoubleLine Capital. He noted the "big divergence" between the market and the Fed's forecast and said: "No reduction this year is hard to believe."

In May, Gundlach had recommended a trade in overlap options with strong interest rate fluctuations. The trade had recently recorded a gain of 22%.

Fed officials have been under intense pressure from more than markets. Trump has been a persistent enemy of the central bank, recently reiterating his demand for lower rates and saying "not happy with what [Powell has] does "as president of the Fed.

In the same vein, the Fed must be concerned about its credibility.

Trump and a growing number of market participants see the December rate hike – the fourth of the year – as a political mistake between several pivots and mistakes that led Powell and other makers to change their public statements to appease the nerves of the investors.

From October to March, the Fed went from "far from being neutral" on rates and with a reduction in balance sheet on the "autopilot", both according to Powell, to adopt a "patient position" "on the policy and finally set a timetable to end the balance sheet program in September. Officials have also lowered the expected level of rate hikes from two to zero and are now in a position to suggest that it is likely that rates will be reduced if FOMC members see things unfold as well.

"It's a difficult transition for the Fed, from two rate hikes this year to the break and getting closer and closer to rate cuts," said Quincy Krosby, chief markets strategist at Prudential Financial. .

Krosby recently reported two decisive events that marked a new policy shift: the statements of Powell and his vice-president, Richard Clarida, earlier in June, which paved the way for potential cuts. In the case of Powell, he pledged to "act appropriately to support expansion", while for Clarida, he committed to adapting his policy to keep the economy "in a good place".

"You can not rule out the comments of Powell and Clarida.This was orchestrated.They laid the groundwork.It is what the Fed does," said Krosby. "It appeared as a verbal intervention and they did not even have to do anything.The market reacted."

Indeed, stocks have posted a strong performance recently, with the Dow Jones Industrial Average rising more than 5% in June after a brutal May. This equity strength gives the Fed another pillar to lean on if it chooses not to cut spending this month, although that has not always been enough to stop easing in the past.

But if the market strength continues and the US and China reach a trade deal, it could at least lower the expectations of reduction.

Tom Porcelli, chief US economist at RBC, said a customer survey had revealed that if a trade deal was concluded, 85% of customers "would not react negatively if the Fed got a pass" in July.