At a Glance
- Economic data on jobs, inflation and GDP are among the upcoming reports the Fed will be watching
- Any surprises in key data could seal the deal for a rate cut at The Federal Reserve July 30-31 meeting
CME Group’s FedWatch Tool expects a rate cut soon. The Federal Reserve (Fed) meets on July 30-31 to decide whether to cut rates and if so, by how much. While some more vocal members of the policy-setting Federal Open Market Committee (FOMC) are ready to accommodate the White House and/or the bond market by cutting rates, others may be more data-dependent, meaning they want to assess and analyze the latest data to see if there are any signs of economic weakness. Here is our take on what the data releases in July 2019 might bring.
July 5: Jobs Report:
Data from the May report surprised with a relatively weak job creation number of 75,000. Monthly jobs data zigs and zags. Low numbers are often followed by a rebound, and that is what seems most likely. By our calculations, job growth is decelerating, yet still on a path to see 140,000 to 190,000 jobs created each month this summer. While that may seem a wide range, jobs data are quite volatile. And even the low end of our range is enough job creation to keep the unemployment rate in the 3.6 percent to 3.9 percent range. If data were your only guide, then the jobs data is unlikely to be sufficient to argue for a cut in rates at this time.
June Fed Minutes
The Fed decided to take a much more dovish tone at its June meeting, in line with the market consensus that it was time for a rate cut. The minutes will give market participants a better sense of whether a July rate cut is a foregone conclusion as the President would like, or whether the Fed still takes current economic conditions into consideration.
July 11: Consumer Price Index
Best estimates put the general inflation rate right around 2 percent, give or take a tenth of a percent or two. The core inflation rate, excluding energy and food, is expected to be two-tenths lower than the general rate. These numbers are way too close to the Fed’s 2 percent target to argue for any rate action.
July 16: Retail Sales
The consumer sector makes up two-thirds of GDP, so these numbers are important. We are looking for a solid number, with a bigger probability of an upward surprise than a negative one.
July 26: Q2 GDP
We are looking for a number between 2.75% and 3.25% — again definitely not indicating immediate economic weakness. Our analysis does suggest that the second half of 2019 will be materially weaker than the first half, but we think it is too early to see the signs of coming weakness.
July 30: PCE Price Index
The last piece of information on the price index arrives just as the FOMC starts to meet on July 30. The Personal Consumption Expenditure inflation reading is typically a little lower than the consumer price index, so more like 1.5% or so for core inflation. That is below the Fed’s 2% target, but hardly screaming rate cut.
Of course, economic data is often full of surprises, and negative surprises would seal the deal for a rate cut. However, if the data comes in close to our expectations, then a rate cut would send a strong signal that the era of data-dependency is over, and that Fed policy is now guided by President Trump and/or the bond markets, depending on your interpretation.
Even though we see the lagging second-quarter economic data as relatively healthy, we expect a deceleration of real GDP in Q3 and Q4. This is more like a slowly evolving deterioration rather than falling off a cliff. The trade war is taking its toll surely, but slowly. And, the possibility of a government shutdown or debt ceiling crisis will weigh on consumers.
Also, any rate cuts will make almost no difference at all. Whether the Fed funds rate is 2.4 percent or 1 percent will not matter to business investment given the uncertain outlook for the trade war, the weaponization of tariffs, and the growing likelihood that the higher tariffs imposed by the U.S. will be permanent. Tariffs are a tax, and their impact will be increasingly felt in the second half of 2019.