In a speech today, July 2, in London Loretta Mester, president of the Cleveland Federal Reserve Bank, argued against an interest rate cut at the central bank’s July 31 meeting. “Cutting rates at this juncture could reinforce negative sentiment about a deterioration in the outlook even if this is not the baseline view,” she said. A cut “could also encourage financial imbalances given the current level of interest rates, which would be counterproductive.” Mester sees the U.S. economy growing by 2% in 2019.
And the market reaction? An increase in the odds of 50 basis point rate cut on July 31 and almost unchanged odds on a 25 basis point cut.
According to the CME FedWatch tool, which uses prices in the Fed Funds Futures market to calculate the odds of a Federal Reserve move on interest rates, the odds of the Fed holding steady at the July 31 meeting are 0%. The odds of a 25 basis point cut are 76.5%, down from 80.1% yesterday, July 1. And the odds of a 50 basis point reduction in interest rates have climbed to 23.5% from 19.9% yesterday.
The odds of a second interest rate cut at the bank’s September 18 meeting are now 76.5% with a 23.5% chance that the Fed will hold steady after a July cut and a 0% chance of no move at either the July or September meeting.
The yield on the 10-year U.S. Treasury fell 5 basis points to 1.98% today. The yield on the 2-year Treasury remained in the recent very narrow band around 1.75% at 1.76% today.
