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See you in September? Fed watchers ponder another rate cut for 2019

After the Federal Reserve did what most municipal market participants expected and cut rates by a quarter percentage point to 2%, all eyes — including the president's — are turning to the September monetary policy meeting.

The Federal Open Market Committee will gather Sept. 17-18 in Washington, D.C. After making a decision on interest rates, it will issue a new Summary of Economic Projections (DOT Plot) before Fed Chair Jerome Powell holds a news conference.

Some think the Fed may cut rates again by 25 basis points while other are not so sure that a second rate cut for 2019 is in the cards.
President Donald Trump was unhappy with the Fed’s latest move.

“What the market wanted to hear from Jay Powell and the Federal Reserve was that this was the beginning of a lengthy and aggressive rate-cutting cycle which would keep pace with China, The European Union and other countries around the world,” Trump said in a tweet on Wednesday. “As usual, Powell let us down, but at least he is ending quantitative tightening, which shouldn’t have started in the first place - no inflation. We are winning anyway, but I am certainly not getting much help from the Federal Reserve!”

According to a market comment by Janney: “The Fed mostly did what the Fed mostly said it would do. The 25 basis point cut in the overnight rate was priced into yesterday’s meeting and officially became the first rate cut since 2008. Many on the Street, including our own Guy LeBas, dubbed this cut neutral bordering on hawkish. The oxymoron of a hawkish cut stems from how Fed Chair Powell positioned the move for policy decisions going forward."

Janney said that Powell's phrases such as "mid-cycle adjustment to policy" and "somewhat more accommodative stance" hint that while that this cut won't be the start of a sea change, it may not be the last of its kind.

"Combined with a relatively optimistic view of the economy, albeit [with a] possible slowdown in jobs growth and overseas headwinds, the Fed decision did not send the same strong dovish communication that the June meeting had,” Janney said.

Dan Henken and Tom Houghton, vice presidents and portfolio managers at Securian Asset Management, weighed in with their views on what the Fed’s move means.

“We expected a 25 basis point cut in the Fed Funds rate," Henken said. “We felt that the fourth-quarter 25 basis point raise by the Fed was a mistake. And they are now returning back to give the market what it wants.”

Houghton said there were mixed messages coming from the FOMC's statement and the Powell press conference.

Easing back on the balance sheet normalization was seen as dovish, but this was balanced off by Powell’s statement on a “mid-cycle adjustment,” which was seen as hawkish and had a negative effect on the markets, he said.

The balance sheet runoff will be ending two months early, starting in August.

"The Fed pulled forward plans to end balance sheet shrinkage versus earlier plans for ending the run-off in October 2019," said Stephen Gallagher, U.S. chief economist at Societe Generale. "We thought it would stick to the original plans. Keeping the policy message aligned appears to be more important. Perhaps it is more dovish, but we do not read too much into this specific development."

Ipek Ozkardeskaya, senior market analyst at London Capital Group, agreed there were no surprises surrounding Wednesday’s decision.

“Gov. Jerome Powell said that this is not the beginning of an easing cycle; it is a preventive measure to ‘insure against downside risks.' But he didn’t say it’s just one cut either, leaving the door open for further action,” Ozkardeskaya said. “Now the attention shifts to Friday’s non-farm payrolls, expected at 165,000 in July versus last month’s strong 224,000 read. Other data may also confirm 0.7% increase in U.S. factory orders versus 0.7% decline previously, and a lower trade deficit in June.”

Ozkardeskaya added that strong data coming out in over the next month could further weaken any dovish expectations about future Fed actions.

Thursday’s data
Economic data released Thursday painted a weaker picture of the U.S. economy.

Initial jobless claims rose 8,000 to 215,000 in the week ended July 27, the Labor Department reported. The previous week’s figure was increased by 1,000 to 207,000. Economists surveyed by IFR Markets had expected claims to come in at 213,000.

Construction spending fell 1.3% in June, the Commerce Department reported. The June figure is down 2.1% from the June 2018 level. Economists surveyed by IFR Markets had expected spending to have risen by 0.4% in June.

The Institute for Supply Management’s manufacturing index dropped to 51.2 in July from 51.7 in June, according to data released Thursday. Economists surveyed by IFR Markets had expected the index to come in at 52.0.

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