Daily Spotlight

Fed Lays Groundwork for Rate Cuts

The Fed kept the funds rate at 2.25%-2.50%. Fed funds futures are indicating a 100% chance of a cut in July and over a 90% chance of another cut by the end of 2019. We were skeptical the Fed would lower rates at the June meeting, as a cut might have been viewed as acquiescing to political pressure. As well, jobs growth, wages and consumer spending have been strong. Our forecast for U.S. economic growth continues to point to slower growth after the 1Q GDP rate of 3.1%, due in part to concerns over trade. The Fed seems to agree and is signaling slower growth and lower inflation. Investors responded by piling into treasuries across the curve, with current rates from 2- to 10-year maturities all yielding well below the current fed funds level. We think U.S. treasury rate levels reflect a weaker global economic outlook. A stronger U.S. dollar and negative or zero yields globally have positioned the U.S. treasury market as the place to be. We look for the Fed to cut rates three times by the end of 2020, largely to boost inflation. We continue to look for longer-term rates to drift higher (and for the yield curve to steepen) as global economies rebound and attract assets currently invested in the U.S. ...  trade. The Fed seems to agree and is signaling slower growth and lower inflation. Investors responded by piling into treasuries across the curve, with current rates from 2- to 10-year maturities all yielding well below the current fed funds level. We think U.S. treasury rate levels reflect a weaker global economic outlook. A stronger U.S. dollar and negative or zero yields globally have positioned the U.S. treasury market as the place to be. We look for the Fed to cut rates three times by the end of 2020, largely to boost inflation. We continue to look for longer-term rates to drift higher (and for the yield curve to steepen) as global economies rebound and attract assets currently invested in the U.S.   more

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