August 2, 2019 / 1:05 PM / 16 days ago

Trade war fears keep traders betting on Fed rate cuts

(Reuters) - Traders on Friday kept bets that the U.S. Federal Reserve will follow this week’s interest-rate cut with further policy easing next month to counter any economic impact from an escalating U.S.-China trade war, even as a government report showed U.S. employers were already slowing hiring in July.

Traders of short-term interest-rate futures are now pricing in about an 80% chance of a rate-cut next month, and about a 70% chance of a further reduction in December, according CME Group’s FedWatch tool that uses futures contracts tied to the Fed’s policy rate to generate estimates of traders’ views.

Those bets are little changed from Thursday, when President Donald Trump’s surprise vow to hike taxes on Chinese imports starting Sept. 1 unleashed frantic buying in interest rate futures markets.

Only 24 hours earlier, those markets had slashed bets on future rate cuts after Fed Chair Jerome Powell described Wednesday’s quarter-percentage-point interest rate cut as an insurance police rather than the start of a lengthy easing cycle.

A report Friday showed U.S. job growth slowed in July and manufacturers slashed hours for workers, but still showed the underlying labor market is healthy, said Mohamed El-Erian, chief economic adviser at Allianz, Newport Beach, California.

“If it weren’t for concerns about the economic situation abroad and market/political pressures, the Federal Reserve would be hard pressed to make the conventional economic arguments for further interest rate cuts in the months ahead,” he said.

Underscoring that point, Boston Fed President Eric Rosengren on Friday released a statement outlining why he dissented on the Fed’s rate cut earlier this week, and why he saw little reason for further easing.

“With the unemployment rate near 50-year lows and inflation likely to rise toward the 2 percent target, and with financial stability concerns being somewhat elevated given near-record equity prices and corporate leverage, I do not see a clear and compelling case for additional monetary accommodation at this time,” Rosengren said.

Under the Fed’s communications policy, Friday is the first day after a Fed rate-setting decision that central bank Chairman Jerome Powell’s colleagues are permitted to air their views.

Rosengren did not refer to trade tensions in his statement, which Powell had cited as one reason for the Fed’s rate cut.

Reporting by Ann Saphir with reporting by Jennifer Ablan; Editing by Nick Zieminski and Bernadette Baum

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