Fed funds futures show increased odds of July rate cut

12.06.2019 15:50|Daniel Kostecki

More and more financial institutions do not exclude the possible and relatively rapid action of the Federal Reserve of the United States, which would bring a cut in interest rates in the near future. Another argument appeared today at 14:30 after publication of inflation data in the US.

Inflation in May in the US fell to 1.8 percent from a five-month high in April, which was below market expectations of 1.9 percent. Meanwhile, core inflation, which excludes food and energy prices, fell to 2.0 percent, also below the market consensus of 2.1 percent. Energy prices fell by 0.5 percent, after an increase of 1.7 percent in last month. In turn, the price of gasoline fell by 0.2 percent compared to an increase of 3.1 percent in April. Food price inflation accelerated to 2.0 percent in May from 1.8 percent in April.

As a consequence, Fed funds futures showed an increased odds of interest rates cut in July by the Federal Reserve after the weaker than expected inflation report in the US. August Fed funds futures, which indicate the expected level of funds after the July FOMC meeting, show a rate at 2.13 percent. It is 24 basis points below the current effective Fed rate at 2.37%. January futures indicate a rate of 1.725 percent at the end of 2019.

The market is now talking more about the next steps of the Fed. Barclays assumes that in July there will be a cut in interest rates by 50 basis points in the US. A similar sentence today was expressed by the PIMCO fund, which stated that a cut of 50 basis points is possible. The S&P rating agency is slightly more cautious. S&P expects the US central bank to cut its federal funds rate by 25 basis points, perhaps already at the September meeting. One of the arguments is that the administration of President Donald Trump fights in trade battles on more than one front, which according to the rating agency may disrupt global supply chains and burden the confidence of entrepreneurs and consumers.

Exactly in a week, on June 19, the Fed's decision on interest rates will be held together with the latest macroeconomic forecasts and a press conference. Then a more detailed opinion of the Federal Reserve should be presented.

 

Daniel Kostecki, Chief Analyst Conotoxia Ltd.

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