Get more context on diverging sentiment between markets and policymakers on interest rates – and how this uncertainty could present a headwind for investors.
May 10, 2019 | 2 minute read
Equity investors saw 2019’s first bout of significant volatility this week as U.S.-China trade tensions ratcheted up again after months of quiet progress. The suddenly more-uncertain trade outlook helped support investors’ growing expectations that the Fed will lower rates this year.
As the chart shows, market-based expectations for the Fed funds rate in December 2019 have moved from as high as 2.9% in November 2018 to just 2.2% today. Investors currently anticipate a cut this year.1
Sentiment surrounding a rate cut has held steady even as markets recovered most of their Q4 losses. However, policymakers have given little indication that they plan to cut rates this year.
At the Fed’s May 1 press conference, Fed Chair Powell noted that the current policy stance is appropriate and twice cited recent inflation readings as being influenced by “transitory” factors.2 This week, Fed Vice Chair Richard Clarida reiterated Powell’s comments in an interview, noting that “temporary factors” are currently suppressing inflation readings and that he sees little reason for the Fed to move up or down.3
The Fed’s notably accommodative shift in December helped set the conditions for this year’s market rally. However, policy uncertainty could present a headwind for investors in the coming months, potentially presenting a new source of volatility.