Odds Of 2019 Fed Rate Cut Are Increasing

Interest rates are once again a hot topic on Wall Street after President Donald Trump’s latest threats to implement up to 25 percent tariffs on all imports from Mexico have raised concerns the ongoing trade wars will slow U.S. economic growth and require interest rate cuts from the Federal Reserve.

According to the CME Group FedWatch tool, the bond market is pricing in an 89.6-percent chance of at least one rate cut in 2019, and a 57.9-percent chance rates will be at least 0.5 percent lower by the end of the year. Just one month ago, the FedWatch tool indicated a 34-percent chance of no rate cut and a 41 percent chance of a single 0.25 percent cut in 2019.

The FedWatch tool is based on the pricing of 30-day Federal Funds Futures, which incorporate market expectations of average daily Federal Funds Effective Rate levels during futures contract months.

Voices From The Street

Several analysts and economists have weighed in on the potential for Fed rate cuts in 2019. Barclays said Friday it now expects the Fed to lower interest rates by 0.75 percent by the end of 2019. Barclays cited U.S. economic deterioration as a result of rising trade tensions.

JPMorgan economist Michael Feroli said Friday a 25-percent tariff on Mexico would require two interest rate cuts by the end of the year.

“Even if a deal is quickly reached with Mexico, which seems plausible, the damage to business confidence could be lasting, with consequences that might still require a Fed response,” Feroli wrote.

Tradestation VP of content strategy David Russell told Benzinga the path forward for the Fed may be dictated by Europe and China.

“They simply cannot keep rates higher if the rest of the world continues to cut. We have a global implosion of interest rates and the Fed does not exist in a vacuum,” Russell said Friday.

Overly Pessimistic Market?

JJ Kinahan, chief market strategist at TD Ameritrade, told Benzinga investor fear has not been reflected in Fed projections up to this point.

“People positioning themselves for a cut are saying the numbers we have now are going to continue to worsen throughout the summer, not only here but across the globe. And they haven’t been that bad,” Kinahan said.

The latest Mexico tariff threats drove the SPDR S&P 500 ETF Trust SPY down 1.1 percent on Friday. The S&P 500 is now down 6.2 percent in the past month as trade tensions have ramped.

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Photo credit: Dan Smith via Wikimedia Commons