Fed Rate Cut Less Likely

The market may have given the Federal Reserve a free pass when they conclude their monetary policy meeting on Wednesday, as the probability of a Fed rate cut has plunged from 92.3% last week to just 47.3% today according to the CME FedWatch tool.

That’s for a 25 basis point cut. A 50 basis point cut had a probability of 22.3% a month ago and now has 0% probability.

That makes the question of what the Fed will do with rates on the 18th far less interesting than the question of how the Fed will guide regarding interest rates over the coming months and years. Longer term projections indicate a roughly 35% chance we’ll get two rate cuts from the Fed by the end of 2019, and another before the spring of 2020 is over.

So a rate cut now likely won’t move markets nearly as much as what chairman Powell has to say regarding future Fed policy.

These rate cuts seem odd to some who can’t understand why the Fed was raising interest rates last year, but are now cutting rates, and potentially becoming more aggressive with those cuts. The reasons are that the Fed was misled by employment data that has since been adjusted lower, and by a jump in capital spending that was caused by the budget deal passed at the end of 2017.

That means the U.S. economy, while still strong, is not nearly as strong as the Fed thought it was in 2018. How much will they need to cut to get back to equilibrium?