Interest Rates: July Data Adds Confusion to Fed-Watching

Summary

WSJ Your Money Briefing: "Interest Rates: July Data Adds Confusion to Fed-Watching" (July 19, 2019)

Host: J.R. Whalen | Guest: Akane Otani (WSJ Markets Reporter)

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Episode Overview

This episode dives into the financial market confusion surrounding the Federal Reserve’s impending July 2019 interest rate decision. With strong economic data and global monetary shifts influencing expectations, even seasoned Wall Street analysts are at odds over whether the Fed will cut rates, and by how much. Guest Akane Otani joins host J.R. Whalen to unpack the latest economic indicators, market sentiment, and the tricky job of "Fed-watching" in this moment of economic ambiguity.

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Key Discussion Points & Insights

1. Rate Cut Expectations: Uncertainty Amid Strong Markets

• Conflicting Predictions: The financial community is split on what the Fed will do—whether they’ll hold rates, cut by 0.25%, or go as far as a 0.5% cut, which would be unusually aggressive given current market strength.
• Quote (Akane Otani, 02:51):

  "It’s hard for people to imagine that stocks that have returned to record territory and economic data as well, pointing to some resilience in the economy, that that sets up a condition where the Fed has to cut rates and specifically cut rates by 0.5 percentage points as its first move."

2. July’s Mixed Economic Data

• Labor Market: Started the month with strong job numbers, easing concerns after previously weak hiring.
• Inflation and Retail Sales: Both showed unexpected strength, suggesting the economy hasn’t slowed as much as feared in Q2.
• Quote (Akane Otani, 03:39):

  "We started the month with really strong figures for the job market. That was reassuring... the labor market report...helped put those worries to bed. And then we got a stronger-than-expected pickup in inflation and also in retail sales."

3. Global Central Bank “Pivot”

• Shift in Policy: 2019 has seen a significant shift among global central banks away from raising rates or holding steady to actively lowering rates, with other countries already cutting theirs.
• Quote (Akane Otani, 04:27):

  "We’ve seen this giant pivot among global central banks from an environment where they were either raising rates or holding rates steady to now lowering of rates. And we already have started to see central banks in other countries cut rates..."

4. U.S. Bond Market Signaling

• Bond Yields: After steady declines throughout the year, yields began to pick up in July. This reversal suggests a perception of resilience in the U.S. economy, making a large Fed rate cut less likely.
• Quote (Akane Otani, 05:02):

  "We did see bond yields start to pick up a little bit after falling below 2% in June...The fact that we’re seeing a bit of a reversal of that trend in the last couple of weeks suggests that actually the data point to some resilience that investors might have been missing."

5. Market Reactions and Rate Path Probabilities

• Market Bets: Futures indicate investors are only considering 0.25% or 0.5% cuts; markets are not even pricing in the possibility of no cut, suggesting a surprise could cause volatility.
• Quote (Akane Otani, 05:46):

  "If you look at federal funds futures, the bets are pretty much either on a 25 basis point cut or 50 basis point cut. And there’s actually a 0% chance priced in right now that the Fed stands put. So that would definitely be a big shock to markets..."

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Memorable Quotes & Moments

• On Wall Street Uncertainty (J.R. Whalen, 00:31):

  "Ask five different people what the Federal Reserve will do with interest rates in late July and you’re likely to get five different answers."

• On the High Stakes of the Fed’s Next Move (J.R. Whalen, 05:35):

  "It seems that Wall Street has its heart set on a rate reduction of some capacity. And if the Fed decides to stand pat, it seems that, like, that could seriously rattle investors."

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Timestamps for Important Segments

• 00:31 — Introduction of Interest Rate Confusion & Market News
• 02:51 — Akane Otani on Why a Large Rate Cut Is Unlikely
• 03:39 — Review of July’s Reassuring Economic Data
• 04:27 — Global Shift Among Central Banks
• 05:02 — U.S. Bond Market’s Recent Reversal and Implications
• 05:46 — Market Expectations & Volatility Risk
• 06:11 — Preview of Upcoming Fed Decision (July 29th meeting)

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Conclusion

This episode underscores the difficulty of predicting Federal Reserve policy in an environment where economic indicators are mixed and expectations have diverged. While Wall Street is almost unanimous in expecting some rate cut, the size and justification remain hotly debated, especially given resilient market performance and global monetary shifts. The July 2019 Fed meeting is set to be a pivotal moment that could either confirm or upend market assumptions.

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Transcript

[A]

This episode is brought to you by Charles Schwab. Decisions made in Washington can affect your portfolio every day, but what policy changes should investors be watching? Washington Wise is an original podcast from Charles Schwab that unpacks the stories making news in Washington right now and how they may affect your finances and portfolio. [e-mail] WashingtonWise.

[B]

Here's your Money briefing. I'm J.R. whalen at the Wall Street Journal in New York. Ask five different people what the Federal Reserve will do with interest rates in late July and you're likely to get five different answers. A Journal Markets report will be by in just a couple of moments and explain how July's economic readouts have thrust a lot of confusion into Fed watching. First, some money and market news. You should know the federal minimum wage would more than double to $15 by 2025 under a bill passed by the House on Thursday. But even though the bill, which was sponsored by Democrat Bobby Scott of Virginia, was a compromise among several sectors of the party, it's unlikely to see a vote in the Senate. And the White House has signaled its opposition as well. The Congressional Budget Office determined that raising the federal wage floor to $15 had the potential to lift 1.3 million people out of poverty and increased pay for 17 million workers. But the study also showed such an increase could lead to 1.3 million people losing their jobs. And research from the consulting firm Captify says on the first day of Amazon Prime Day on July 15, there were 18 times more searches for the phrase canceling Amazon prime than there were the previous day. And on one of the biggest online shopping days of the year, Captify says searches for ebay, Best Buy, Target and Walmart rose 255%, and Adobe analytics has run the numbers the past several years. Turns out the two day Prime Day event is the third and fourth time outside the holiday shopping season where E. Commerce sales exceeded $2 billion. The other two were Labor Day 2018 and this year's Memorial Day holiday. Let's talk about knowns and unknowns. What's known is that the Federal Reserve is debating whether to announce an interest rate reduction at its meeting at the end of July. What's unknown is how deep a rate cut will come from the Fed. And Wall Street Journal markets reporter Akane Ohtani is here. She says that July's economic data is raising all sorts of questions. So Akane, you you know, many on Wall street say that a rate cut larger than 25 basis points is unlikely because of how well the stock market's been doing in July.

[C]

Yeah, it's hard for people to imagine that stocks that have returned to record territory and economic data as well, pointing to some resilience in the economy that that sets up a condition where the Fed has to cut rates and specifically cut rates by 0.5 percentage points as its first move. I mean, remember, this is going to be the first rate cut since crisis. While there are a lot of analysts and investors who believe maybe they're going to do an insurance cut and basically take rates down by 0.25 percentage points just to sort of safeguard against a slowing of the economy, it's really hard for a lot of folks to imagine that they're going to do something more drastic than that.

[B]

What else has come out in the data this month that makes the measure of a rate decrease hard to predict?

[C]

We started the month with really strong figures for the job market. And that was reassuring because the month before we had weaker than expected hiring. And that had sort of introduced some worries to some folks that maybe the weakness that we were seeing in sectors like manufacturing was starting to trickle elsewhere into the economy. But the labor market report that we received was very much sort of helped put those worries to bed. And then we got stronger than expected pickup in inflation and also in retail sales. So those three things sort of helped a lot of investors sort of feel that the economy didn't slow down as much as maybe some had feared in the second quarter.

[B]

You know, there are a lot of people on Wall street who know the Fed like the back of their hand, and they know how to measure what the Fed might do based on trends, based on precedent and whatever. But everyone has a different opinion.

[C]

And I think that's what's so interesting about the Fed. I mean, it has sort of been one of the biggest themes driving the markets this year. The fact that we've seen this giant pivot among global central banks from an environment where they were either raising rates or holding rates steady to now w lowering of rates. And we already have started to see central banks in other countries cut rates sort of in anticipation of what the Fed is likely to do at the end of the month.

[B]

Also, the bond market here in the US has given a pretty clear signal that a 50 basis point reduction might be unrealistic.

[C]

We did see bond yields start to pick up a little bit after falling below 2% in June. And that's quite interesting because generally the story of this year in the bond market has been falling bond yields. Bond yields have been falling as investors have been pricing in the Fed lowering rates to respond to a slowing economy. So the fact that we're seeing a bit of a reversal of that trend in the last couple of weeks suggests that actually the data point to some resilience that investors might have been missing.

[B]

It seems that Wall street has its heart set on a rate reduction of some capacity. And if the Fed decides to stand pat, it seems that, like, that could seriously rattle investors.

[C]

We're not even seeing markets price in that possibility, interestingly enough. I mean, if you look at federal funds futures, the bets are pretty much either on a 25 basis point cut or 50 basis point cut. And there's actually a 0% chance priced in right now that the Fed stands put. So that would definitely be a big shock to markets and we could see some volatility there if that were the case.

[B]

All right, we'll see it play out the week of July 29th when the Fed meets and announces its decision. And that is Wall Street Journal markets reporter Akane Ohtani here in our studio. Akani, thanks for coming on the show.

[C]

Thanks for having me.

[B]

And that's your money briefing. I'm JR Whalen in New York for the Wall Street Journal.

[A]

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