The U.S. Federal Reserve on Wednesday dashed hopes of any cuts to its benchmark interest rate this year but also left the door open to one rate cut in 2020 and one rate hike in 2021
The Federal Open Market Committee (FOMC) voted 9-1 to keep its benchmark rate in a range of 2.25 percent to 2.5 percent, which is where it's been since December 2018. St. Louis Federal Reserve President James Bullard cast the lone dissenting vote. Bullard has argued the Fed has to cut rates due to muted inflation, the inverted yield curve and ongoing uncertainties about trade.
The uncertainties referred to by Bullard and his other colleagues on the FOMC clearly include president Donald Trump's trade conflicts with America's major trading partners, especially China.
Economists have long contended Trump's trade war against the world is the leading threat to U.S. economic expansion, which will become the longest on record in July.
"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," said a statement from the FOMC.
This language echoes a remark made by chairman Jerome Powell two weeks ago analysts interpreted as a signal rate cuts are on the way.
Analysts noted the FOMC excluded the word "patient" from this statement, an affirmation of its concerns about the evolving and uncertain economic outlook.
The committee also changed language from its May statement to indicate economic activity is "rising at a moderate rate," a downgrade from "solid."
FOMC members said they still expect "sustained expansion of economic activity" and a move toward 2 percent inflation in their baseline scenario. They do, however, realize that "uncertainties about this outlook have increased."
Despite the Fed's clear indication of no rate cuts this year, markets are still betting the central bank will actually cut interest rates, perhaps as early as July. Statements from Powell and some Fed officials seem to point in this direction. Powell hinted at the possibility of a rate cut in a press conference following the FOMC statement.
"Many participants now see the case for somewhat more accommodative policy has strengthened," he said.
A widely circulated "dot plot" of expectations among the 12 FOMC members before the meeting shows eight favoring one cut this year. Nine, however, voted in favor of the status quo on Wednesday.
A survey of the 17 Fed officials shows close to half now expect at least one rate cut this year. Another seven projected two rate cuts. When these officials previously issued forecasts in March, none predicted a rate cut in 2019.
Funds market traders priced-in a 26 percent chance of a cut at the Fed meeting yesterday. They also estimate an 82.5 percent chance of a rate cut in July and a 60.4 percent chance of a second cut in December. The market expects a third cut to come in March 2020.
