The Fed delivered a less dovish than anticipated cut.
The Fed Funds target range was cut 25 bp to 2.00-2.25%, as expected. The balance sheet runoff will also end August 1. There were two dissents in favor of no cut from George and Rosengren. The accompanying statement was balanced, saying uncertainties remain and that the Fed will act as appropriate. The Fed said it will monitor incoming information as it “contemplates” its future rate path.
Simply put, this does not sound like a central bank that’s in a hurry to cut again. With the US data for the most part firming since the June FOMC meeting, it makes sense to not appear to be pre-committing to another cut. WIRP shows 57% odds of a 25 bp cut at the next meeting September 18 and zero odds of a 50 bp cut then. We think the odds are still too high, but of course it will depend on how the data come in over the summer.
In the Q&A session, Fed Chair Powell sounded relatively upbeat. He did acknowledge downside risks from trade tensions and slowing global growth but appeared to play up the “insurance” and “risk management” aspects of this rate cut. Indeed, Powell signaled that this rate cut isn’t the start of a protracted easing cycle.
The US rates markets are starting to adjust, but more needs to be done. The implied yield on the January 2020 Fed Funds futures contract rose to 1.80%, the highest since May 31. Yet this still implies between 1-2 more cuts this year and simply seems too aggressive in light of Powell’s tone at his press conference.
DXY is trading at new highs for this year. There aren’t a lot of chart points between here and the May 2017 high near 99.888. Likewise, the euro is trading at new cycle lows and the next major target is the May 2017 low near $1.0840. Still, the FX moves seen so far have not been very large and this supports our view that a greater adjustment in the US rates markets is needed to keep this dollar rally going.