State Street Comments on Federal Open Market Committee Meeting

In reaction to today’s US Federal Open Market Committee (FOMC) meeting, Lee Ferridge, head of multi-asset strategy, the Americas at State Street Global Markets; and Antoine Lesné, head of EMEA strategy and research for SPDR ETFs, offer their views.

Ferridge commented, “As expected, the FOMC left rates unchanged in June’s meeting but opened the door widely to the prospect of a July cut. With the market pricing more than an 80 percent likelihood of an ease by the July meeting, it is the least the Fed could have done to satisfy expectations. Weak global economic data, falling inflation expectations and continued concerns over the trade war explain the Fed’s dovish stance. However, it has to be recognised that from a domestic standpoint it is hard to justify the three cuts that the market is pricing over the course of 2019. The economy continues to grow above trend, the labour market is at full employment and while inflation remains below the two percent target, it is not too far away from the core Personal Consumption Expenditure (PCE) Price Index year over year, which is at 1.6 percent. Unless the domestic background deteriorates further, it remains difficult to see the Fed cutting three times in 2019.”

Lesné commented, “As widely priced by the market and expected after Mario Draghi’s comments in Sintra, the FOMC pointed towards the direction of a potential cut in the June meeting but not necessarily July. Next week’s potential meeting between the US and China at the G20 meeting in Osaka may not be enough to restore long-term confidence and the inflation backdrop does not warrant keeping rates too high. As the overall leading indicators are not collapsing and employment data remains strong there is no immediate hurry to cut in June but trade tensions impact could be seen further down the line. Despite the recent rally in treasuries and recent positive headlines, we expect front end treasury yields to fall meaningfully on the news. Meanwhile the US dollar could still keep its lure versus the euro, but some emerging market currencies could firm up helping local currency denominated bonds from these markets.”