For months, Donald Trump has been browbeating on the Federal Reserve to cut interest rates. Now, markets are betting that he’ll get his wish. It won’t be a cause for celebration.
Last month, US employers added just 75,000 jobs, way below expectations of 185,000. Revisions also wiped 75,000 jobs off estimates for the previous two months. Monthly wage growth also came in below expectations.
In reaction to today’s jobs report, traders sold the dollar, stock futures rose, and Treasury yields fell, as investors doubled-down on expectations that the US central bank will cut rates soon. Between Dec. 2015 and Dec. 2018, the Fed raised rates nine times. The Fed’s benchmark overnight rate is currently set at a range of 2.25-2.50%.
Traders in the futures market are pricing in a 78% chance of a rate cut at the Fed’s July 30-31 meeting, up from 53% a week ago, according to the CME FedWatch Tool. By year end, rates could be 75 basis points lower, options trading implies.
At the end of March, Trump berated the Fed for raising interest rates, saying GDP growth and the stock markets would be even higher without the financial tightening.
Later, as the US trade war with China intensified, the president said that China benefitted from low interest rates, and the Fed had made a mistake by raising rates. The trade war, which is now being fought on multiple fronts, could weaken the economy to the point that it forces the Fed to give Trump the cuts he craves. Earlier this week, Jerome Powell, chairman of the US central bank, said policymakers were watching the trade war closely and would be willing to act if needed.
“We do not know how or when these issues will be resolved,” Powell said the trade tensions with China, Mexico, the EU, and other major trading partners. “We are closely monitoring the implications of these developments for the US economic outlook and, as always, we will act as appropriate to sustain the expansion.”