By Greg Robb, MarketWatch
Reuters Enlarge Image
Economists had been nearly certain the Federal Reserve would cut interest rates in coming weeks. But now, after the solid June jobs reports, a few are having doubts.
Most prominent in this camp is Andrew Hollenhorst, head of the economics team at Citigroup. He thinks the Fed will refrain from cutting rates after their meeting on July 30-31.
In an interview, Hollenhorst said that while Fed Chairman Jerome Powell and his No. 2 Richard Clarida have made it clear that near-term cuts are on the table given “cross currents” hitting the economy in the form of trade fights and weak global growth, other officials, including Dallas Fed President Rob Kaplan, have taken a more “wait-and-see” stance on whether these forces dampen the domestic economy.
The bounce back for the labor market may lead the majority on the Fed to agree the incoming data since the June meeting has not met a “threshold to act,” Hollenhorst said.
If the Fed holds interest rates steady, it will mostly likely maintain an easing bias, meaning the committee more likely to cut rates, if necessary, at upcoming Fed meetings.
This forecast is “a close call,” Hollenhorst admitted.
The market still sees a roughly 100% chance of a quarter-point rate cut at the end of the month. The jobs report has removed expectations of a half-point move then.
That’s why Fed communication this week is so important, Hollenhorst said. The Fed won’t pause this month if the market still see the odds of a rate cut so high. To bring those odds down, “Fed officials are going to have to telegraph their caution to the market,” he said.
Powell will talk to Congress on Wednesday and Thursday. Hollenhorst said he also wants to hear from New York Fed President John Williams, set to speak on Thursday. Williams is always a Fed voter.
Stocks /zigman2/quotes/210598065/realtime DJIA -0.78% were set to open lower Tuesday on concerns about the Fed’s plans.
Steve Stanley, chief economist at Amherst Pierpoint, has taken a jaundiced view of the market’s ”game of chicken” with the Fed over rate cuts.
Market participants have focused on data they believe shows the economy was losing altitude fast in making a case for easing rates. But after the June jobs report, the narrative shifted to the idea that the Fed can’t disappoint the markets, Stanley said, in a note.
“There is still a fair amount of important information to come before July 31, so Powell may want to continue to keep his options open. But even that message would probably imply that a July rate cut is more up in the air than current market pricing would suggest,” Stanley said.
What would happen in the market if the Fed surprises and delays a rate cut?
Roberto Perli, an analyst with Cornerstone Macro, said he didn’t think there would be much market reaction to a scenario where the Fed forces investors to revise their expectation of a rate cut to September.
However, a scenario where expectations of a cut are removed completely would be “a shock,” Perli said, with the yield curve flattening and equities selling off significantly.