© Reuters.
By David Wagner
The FOMC meeting of the Fed in the month of June ends this evening, with the announcement of the rates to 20h and the press conference of Jerome Powell from 20: 30.
There is little chance that the Fed will announce monetary policy decisions this evening, the market anticipating that 23.3% chance that the Fed lowers its rates, according to the barometer of the Fed funds rate Investing.com.
However, for the meeting scheduled for 31 July, the probability that the Fed lowers its rate rises to 83.5%. In other words, the market is almost sure that the Fed will lower rates next month.
The Fed not liking traditionally not induce shocks on the markets, if his intention is actually to lower the rate next month, it should provide tonight’s clues are clear enough in this sense.
Conversely, if the Fed has no intention of raising its rates next month, or if this possibility is more distant than the market thinks, the Fed will have to heart to correct investors ‘ expectations.
So the question is whether the Fed has more reasons to lower its rates to keep them at their current level.
Trump puts pressure on Powell to lower the rate
The pressure exerted on Jerome Powell by Donald Trump is one of the reasons that make it more likely a dovish position from the Fed this evening.
For the past several months, the president, Trump has not stopped from publicly criticizing the monetary policy of the Fed, not hesitating to take it personally to its president.
Trump believes that the Fed did not raise its rates last year, and did not hesitate to call for rate cuts.
Yesterday, we learned even that the White House would have achieved in the month of February a study on the legal means to “demote” Jerome Powell, and Donald Trump would have consulted lawyers about a possible dismissal of the boss of the Fed.
Draghi has also added pressure on Powell yesterday
The fact that the president of the ECB Mario Draghi has referred to yesterday’s rate cuts also adds extra pressure on the shoulders of Powell, knowing that Donald Trump is not sparing in criticisms regarding the weakness of the Euro against the Dollar.
He was promptly criticized the intervention of Draghi yesterday on Twitter (NYSE:TWTR), on the grounds that the fall of the Euro that implies a policy of the ECB more flexible, confer a commercial advantage unfair to the Euro :
The economic context could also justify a rate cut from the Fed
From the point of view of the economic outlook, the Fed also has reasons to support the economy by lowering rates.
The last report NFP on employment has been particularly disappointing, which is an indicator of concern.
In addition, the trade war is also a significant risk to the economy, while expectations of concrete progress in the negotiations are relatively low, despite the meeting Trump-Xi, which will take place at the end of the month.
Finally, several key indicators, such as the interest rate curve, point to a recession that the Fed should without doubt want to avoid.
And if the Fed surprised the market ?
Even if the Fed has sent several signals to be expected at a meeting dovish, and even if the economic context could actually justify a rate cut, a surprise is not excluded.
This surprise could take the form of a speech optimistic on the part of Powell, who miniserait the risks that weigh on the economy, or even just a speech similar to the previous month.
In fact, the expectations of the market are so high that if Jerome Powell does not clearly state that the Fed will lower rates next month, violent movements are to be expected on the stock market and the Dollar.
The Dollar were the big winner, but the equity market does not appreciate without a doubt not.
On the EUR/USD, the theme of the divergence of monetary policy between the Fed and the ECB would be on the front of the stage as a factor declines, and new lows annual 1.1106 would be possible in the short term.
