Wall Street Asks When, Not If, The Fed Will Cut Interest Rates

Jeannie Matthews
June 15, 2019

The sharp escalation in the U.S.

The reason to cut interest rate targets (and the interest the Fed pays on bank reserves) is that prices are falling for most commodities and many consumer goods. The Labor Department's jobs report for May showed employment growth of just 75,000, well below estimates.

In a major speech last week, Fed chair Jerome Powell signalled his readiness for a rate cut when he dropped language used over previous months that the Fed would remain "patient" and declared it was monitoring the impact of the trade conflict on the U.S. economy and would "act as appropriate to sustain the expansion". Others expect the rate cut to happen in the September meeting.

Interest rates cuts that are clearly recognised as a means of boosting financial markets and effecting a further redistribution of wealth to the financial oligarchs in the U.S. and worldwide, while the attacks on workers' jobs and living standards are intensified, will only add to the greatest fear of all in ruling financial circles.

In the 12 months through May, the CPI increased 1.8 per cent, slowing from April's 1.9 per cent gain. Trump tax cuts and deregulation have increased the supply of goods and services - which means lower, not higher prices. But costs for auto insurance, used motor vehicles and recreation fell.

Core inflation, which is seen as a truer measure of domestically generated inflation pressures because it excludes changes in commoditised food and energy prices, surprised on the downside in May.

The dollar index versus a basket of six major currencies was steady at 96.957 after rising more than 0.3% overnight. The probability was a still-high 40% for two rate cuts this year.

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US President Donald Trump accused Europe of devaluing the euro zone's single currency in a series of tweets on Tuesday that also targeted U.S. After that the G20 summit in Osaka, Japan takes place on June 28th and 29th.

"We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion, with a strong labour market and inflation near our symmetric two percent objective".

The Swiss franc rose 0.2% to 1.1215 francs per euro after the Swiss National Bank said it could further relax its ultra-loose monetary policy but did not sound as concerned about the economic outlook as some analysts had expected.

Fed economists are fixated on the belief that simply printing money can increase growth, which is plainly and dangerously wrong. Data for May will be released later this month. Economists polled by Reuters had forecast the CPI would rise 0.1% in May and 1.9% year-on-year.

Gasoline slipped 0.5% in May after seasonal adjustments. Food prices rebounded 0.3% in May after dipping 0.1% in the prior month.

Consumer Price Index data on Wednesday, which is closely watched by the Federal Reserve, is the next inflation indicator. There were gains in hospital and doctor fees. Electricity prices were down 0.8%.

Apparel prices were unchanged after two steep declines. "This final round of tariffs against China is the big, big concern", said Scott Brown, chief economist at Raymond James.

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