Will The Fed Cut Interest Rates Soon?

Ann Santiago
June 23, 2019

President Donald Trump said at the White House Thursday afternoon "you'll soon find out" whether the United States meant to strike Iran.

Oil rose more than 3% towards $64 a barrel on Thursday after Iran shot down a USA military drone, raising fears of a military confrontation between Tehran and Washington.

That was not enough to change the median outlook for the Fed's targeted overnight lending rate, which officials projected to remain in a range of between 2.25 per cent and 2.5 per cent for the rest of this year.

The Dow was up 0.4%, or 111 points, and the S&P 500 was up 0.4%.

The S&P/TSX composite index closed up 63.04 points to 16,574.83 after reaching an intraday high of 16,603.94, less than 70 points off April's record high. SGX Nifty trends suggest a positive opening for Indian equities as it has risen 40 points or 0.34%.

"Stocks' resilience in the face of growing US-Iranian geopolitical tension is a stark reminder not to fight the Fed".

But this resilience may be fickle.

Emerging markets across Asia, Africa, Latin America and the Middle East will all move to applaud the news that lower interest rates in the United States will encourage capital to spread across multiple developing regions. This equated to the highest gold prices in over five years.

Spot gold may gain more to $1,404 per ounce, as it has cleared a resistance at $1,371, according to Reuters technical analyst Wang Tao. "The forces that are keeping inflation below target seem unlikely to be exclusively transitory.Lowering the target range for the federal funds rate at this time would provide insurance against further declines".

"In light of increased uncertainties and muted inflation pressures, we now emphasize that the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion", he said.

US Federal Reserve officials were divided Friday over how seriously to treat a slide in inflation, with one top policymaker saying the Fed was "close" to its inflation target and three others warning the weak price increases posed major risks the Fed may need to attack with lower interest rates.

"The Fed didn't surprise investors with the decision to maintain rates, but the split vote tells us that a cut is on the way and it's increasingly likely that it will be in July, as bond markets have been hoping", Neil Birrell of the Chicago-based investment advisory Premier Asset Management said. After today's announcement, the company's FedWatch Tool predicted a 100 percent chance of rate easing after the July meeting.

Many economists have said Fed rates are still in accommodative territory, as the so-called "neutral rate" - the level of borrowing costs that neither supports nor hinders the pace of GDP growth - is around 3 per cent in the present-day U.S. economy.

Support awaits at 1.1270 which had the same role next week, then 1.1250 that capped the currency pair last week, and 1.1200 which provided support early this week.

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