Odds of Federal Reserve rate cut in 2019 jump as growth outlook dims

Investors are now pricing in a greater probability that the Federal Reserve will cut rates rather than raise them in 2019, highlighting the rising fears that the economic slowdown could deepen into an outright recession.

Traders have been ratcheting up bets that the US central bank will not be able to raise interest rates the two times it planned for in 2019. The last time it indicated such an intention was as recently as the December meeting.

But with markets still rocky and worries over China’s economy mounting, the Fed Funds futures market – where traders can speculate on where interest rates are heading – now indicates that investors think there is no chance the Fed lifts rates in 2019.

Moreover, the implied odds on the Fed actually reversing rates and cutting rates from the current 2.25-2.5 per cent corridor has jumped to nearly 30 per cent, up from almost zero when the market turbulence began this autumn. Indeed, the markets-derived probability of a rate cut has doubled just since the start of the year.

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A combination of poor economic data and more cautious notes from the Fed helped fuel the jump in rate cutting expectations.

The ISM Manufacturing index was much weaker than expected in December, according to data released on Thursday morning, and Robert Kaplan, the president of the Federal Reserve Bank of Dallas, on Thursday indicated that he thought the Fed should pause its rate increases until there is more clarity on the global economy.

“We should not take any further action on interest rates until these issues are resolved, for better, for worse,” Mr Kaplan said in a Bloomberg television interview.

“So I would be an advocate of taking no action and – for example – in the first couple of quarters this year, if you asked me my base case, my base case would be take no action at all.”

Although Mr Kaplan is not a voting member of the Fed's monetary policy board this year, he is considered close to chair Jay Powell and is part of the central bank's subcommittee on communications with markets, noted Tapas Strickland, a strategist at National Australia Bank.

– Copyright The Financial Times Limited 2019