Background on the Federal Reserve and Its Role
The Federal Reserve, often referred to as the “Fed,” is the central banking system of the United States. It was established in 1913 to provide a safer, more flexible, and stable monetary and financial system for the country. The Fed uses monetary policy to influence economic conditions, including interest rates, to promote maximum employment, stable prices, and moderate long-term interest rates.
U.S. Job Report and Its Impact on Fed Rate Expectations
Recently, the U.S. job report revealed an increase in unemployment for the previous month. This development has led to a rise in market expectations that the Federal Reserve will lower interest rates during its January policy meeting.
Futures Market Reaction
According to estimates from LSEG, the futures contracts on U.S. interest rates valued the likelihood of a Fed rate cut at 31% for the upcoming January meeting, up from 22% just before the job report release. The last estimate stood at 27%, while the chances of a pause were at 73%.
Future Rate Cut Expectations
The futures market continues to anticipate two 25-basis-point rate cuts in 2019. The first reduction is expected in June, with an 83% probability.
Potential Consequences of Rate Cuts
Raphael Bostic, President of the Federal Reserve Bank of Atlanta, has warned that new rate cuts could position U.S. monetary policy in an accommodative stance, potentially stimulating growth but also putting the country at risk of a new inflationary surge and rising inflation expectations.
Key Questions and Answers
- What is the Federal Reserve? The Federal Reserve (Fed) is the central banking system of the United States, responsible for implementing monetary policy to promote maximum employment, stable prices, and moderate long-term interest rates.
- What caused the rise in Fed rate cut expectations? The rise in expectations is due to a recent U.S. job report showing an increase in unemployment, leading markets to anticipate a Fed rate cut during the January policy meeting.
- How many rate cuts are expected in 2019? The futures market anticipates two 25-basis-point rate cuts in 2019, with the first reduction expected in June.
- What are the potential consequences of Fed rate cuts? Rate cuts could stimulate economic growth but also increase the risk of inflation and rising inflation expectations.
