In relation to the upcoming date of the Federal Reserve System’s (Fed) Federal Open Market Committee (FOMC) meeting, analysts’ speculation continue to grow regarding the interest rate cuts and the time horizon of such changes.
As usual, the FOMC meeting will be a two-day session of the US Central bank’s key committee members on July 30 and 31 in Washington, DC. Prior to this meeting, not only analysts and financial strategists share their opinions about the potential interest rate cuts, but also the US Central bank’s Federal Reserve System key members. This time the President and Chief executive officer of the Federal Reserve Bank of Chicago, Mr. Charles Evans, gave his opinion on this topic.
Mr. Evans, Chicago Fed President, said that even two rate cuts may not be sufficient in the long run, given low inflation and global trade tensions. In addition, other global financial experts, such as, for example, Deutsche Bank Wealth Management’s global chief investment officer Christian Nolting, said the Federal Reserve will cut interest rates twice but a four-time rate cut chances are lower. Mr. Nolting predicted that there would be a 25 basis points cut at the end of July, which he termed an “insurance cut, or pre-emptive cut,” in the face of weaker economic growth.
Based on these speculations, even though with a high degree of probability, the international foreign exchange market reacted to the exchange rate of the US dollar (USD). On 18 July, 2019, at 6:40am CET, the USD exchange rate, measured by the US Dollar Currency Index (DXY), which compares the USD with another six major world currencies, was at a point level of 97,09 USD points with a daily drop of – 0.14% of its point value. The EUR/USD global currency pair thus traded on the Forex market with strengthening of the euro (EUR) by + 0.13% against the US dollar (USD) and the exchange rate of US$1.1238 for EUR.
While traders and investors are pricing a 100% probability of an interest rate cut, according to CME’s FedWatch Tool, the opinions remain divided on how deep the easing will be. According to the survey, 28.7% of traders currently expect a more aggressive cut by half a percentage point. Mr. Nolting of DB said that the key to reducing the economic slowdown is whether the Fed, which has a 2% inflation target, is able to raise consumer prices. The US Central bank monitors the price index of the core personal consumption expenditures for monetary policy. This index rose by 1.5 percent year-on-year in May 2019, but this year it did not reach its target. Yet investors expect the FOMC to cut interest rates in the US amid a trade dispute with China, but at the same time they realize that this will deepen the global slowdown. Lower interest rates stimulate the economy as they reduce cost of loans and investments into various assets.