The Federal Reserve might scrap the patient approach and possibly open doors to potential rate cuts this year. In the updated economic projections issued by the Federal Reserve on 19th June ’19, it was concluded that the benchmark interest rates remained stable. But Federal Reserve indicated a possible rate cut for the first time since 2008, due to uncertainties mounted by the economic risk and tariff war. Furthermore, inflation is expected to miss the target of 2% in FY20.
Amidst slowing economic growth and tariff war the Federal Open Market Committee (FOMC) expects the rate cut before the end of this year. Furthermore, they have dropped the patience approach due to the escalating economic risks.
The Chairman of Federal Reserve, Mr Jerome Powell left the key policy rates in June’19 unchanged in the range of 2.25% to 2.50%. The barometer for the state of the economy, the long-run federal funds rate was cut from 2.80% to 2.50%. The updated economic projections displayed the committee member’s outlook of growth and unemployment is largely unchanged. The headline inflation was below their projected inflation in March’19 of 1.8% at 1.5%.
According to one policymaker, he expected one rate cut, and eight out of seventeen Fed policymakers anticipated the benchmark rate cuts to remain steady; seven policymakers expected two rates cuts by the end of 2019. Furthermore, the rate hike was expected by one policymaker.
The Federal Reserve disclosed that the median outlook of the appropriate fed rates is at 2.4% in June’19, unchanged as compared to the previous release. Furthermore, the Fed policymakers forecasted the median to remain unchanged in 2019, but half of the members saw lower rates.
The FOMC forecasts the economic growth to be slightly stronger in 2020, in addition to this, unemployment rate and inflation were seen slightly lower as against March projections.
As per the Median Fed long-run forecast, the GDP growth remained unchanged at 1.9% as compared to March projections; the unemployment forecast rate is at 4.2% as against previous projections of 4.3%. The Personal Consumption Expenditure (PCE) price index was projected at 2.0% in March and the forecast projections remain unchanged.
The median view of the Federal funds rate at the end of 2020 is projected at 2.1% as compared to March projections of 2.6%. At the end of 2021, the Fed funds rate has been forecasted at 2.4% as against the March projections of 2.6%. Furthermore, the median view of Fed funds rate, in the long run, has been projected at 2.4% vs. 2.8% in the March projections.
Tariff war escalation worries the Federal policymakers:
The Federal policymakers are concerned over the escalating trade war between US-China and slowdown in economic growth. Moreover, they are anxious about the unpredictable outcome of President Donald Trump’s trade dispute with China. On 5th May ’19, President Trump slammed new tariffs on China; this led to markets being upended. Recently, there have been some signals of progress in the dispute with China.
The policy announcement had a positive outcome on the US stocks and S&P 500 breached a record high of 2,926.46 points. The Dow Jones Industrial Average inclined 0.15% to end 26,504.27 points. Furthermore, the Nasdaq Composite added 0.42% to 7,987.32.