An Urban's Rural View

Interest Rates are Headed Down, but When?

Urban C Lehner
By  Urban C Lehner , Editor Emeritus
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Farmers and ranchers would very much like lower interest rates, but there are several reasons to question the likelihood of a July cut. (DTN file photo by Jim Patrico)

The odds are going up that interest rates will be going down, but maybe not as fast as many in the markets seem to expect.

Federal Reserve policy, which in recent months has been sliding away from tightening and towards easing, just slid further in that direction. Fed policymakers voted at their June 18-19 meeting to keep interest rates unchanged, but they hinted strongly that rate cuts are on the way.

The Fed's latest statement stressed that "uncertainties" about the economic outlook have increased. It dropped the word "patient" in describing its approach to changes in rates.

More: One Fed official dissented from the decision to keep rates unchanged, favoring a cut now instead. On the "dot plot," where Fed policy makers anonymously indicate their preference for rates, eight thought they should be lower by the end of this year. Eight others want rates to remain flat through the end of this year, and one wants a rate increase, but by the end of 2020 a majority think a cut will be needed. (…)

"The case for somewhat more accommodative policy has strengthened," Fed Chair Jay Powell said at his post-meeting press conference.

The Fed is actually behind the markets in moving towards lower rates. Investors have priced in a more than 80% chance that the Fed will cut rates at its July meeting. (…)

"The Fed didn't surprise investors with the decision to maintain rates, but the split vote tells us that a cut is on the way and it's increasingly likely that will be in July, as bond markets have been hoping," Neil Birrell, chief investment officer at Premier Asset Management, told CNBC.

It's always risky to bet against the markets, but there are several reasons to question the likelihood of a July cut.

One is the dot plot. While the configuration of dots has been moving toward cuts with each Fed meeting, it's still a minority who favor cuts this year.

That could change by the July meeting but if it does it will be because new data indicates a weakening economy. But the recent data has shown an economy that's weak in some respects, yet strong in others and there's a good chance in the short term the signals will continue to be mixed.

Powell keeps stressing that the Fed will rely on the data in making its decisions and we ought to believe him. That's what the Fed is supposed to do, after all. History will judge him on whether he did. President Donald Trump's counterproductive scolding of the Fed makes it all the more important for the Fed to be data-driven. To preserve its independence, it can't be seen to buckle to political pressure.

There is a way for the president to force the Fed to lower rates, and that's by pursuing a trade policy that weakens the economy. The Trump trade wars have undermined business confidence and contributed to softer global growth and weaker business investment. "News about trade has been an important driver of sentiment," Powell said at his press conference. "We're also looking at global growth. It's really trade developments and concerns about global growth that are on our mind."

On the other hand, a rate cut would be less likely if Trump and China's Xi Jinping strike a deal when they meet later in June; if Trump's negotiators and Japan reach agreement on trade; or if Congresses ratifies the U.S.-Mexico-Canada trade pact.

Business borrowers, including farmers and ranchers, would very much like lower interest rates. But as the Wall Street Journal put it, for the economy as a whole "A future in which the Fed decides it doesn't need to cut rates would be better than one in which it thinks it must." (…)

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