Markets were pricing 80% chance of no change to Fed rates in 2019 and only 10% for a cut. In the Wall Street Journal February survey only Steven Blitz, our Chief US Economist, predicted a rate cut in 2019.
Real growth will slow this first quarter towards 2% QoQ, but because the reasons are transient (shutdown, weather, inventory), the Fed will keep to its 2.25%-2.50% federal funds rate. We do anticipate an “ease” by way of a technical adjustment to the pace of balance sheet reduction (QT) at the FOMC March meeting to help steepen the yield curve. Even with the recovery in the equity market, US Treasury yields, including inflation expectations, remain well below late 2018 highs. The two-year note still yields about the same as the funds rate – never a good sign for bank lending. In other words, the Fed still needs to act pre-emptively. The “real” slowdown in domestic growth is likely to come later this year - we think by summer - and that is when we expect the Fed to finally drop the funds rate by 25 basis points.
The Fed cut rates on 31 July. The Wall Street Journal ran a piece noting that Steven Blitz, our Chief US Economist, was the only economist of 62 to predict a Fed rate cut in 2019 in their February survey.