May 31, 2019 - Economy

Rate cut bets spike after Trump's Mexico tariff tweet

Data: CME FedWatch Tool; Chart: Naema Ahmed/Axios
Data: CME FedWatch Tool; Chart: Naema Ahmed/Axios

Trump's Mexico tariff tweet further accelerated expectations of interest rate cuts from the Fed this year.

What's happening: Early Friday morning, Fed fund futures prices showed the chances of the Fed not cutting U.S. interest rates by its Dec. 11 meeting had fallen below 10%, with the probability of cutting rates at least 2 times rising to 61%, according to CME Group's FedWatch tool.

  • The likelihood of 2 rate cuts or more was just 25% on April 30.
  • Fed Chair Jay Powell and other policymakers have said the central bank does not plan to cut rates even once in 2019.

What they're saying: "The story here is that market participants anticipate the Fed will need to cut rates to maintain the [economic] expansion," University of Oregon economics professor Tim Duy wrote early Friday morning.

  • "The Fed has so far resisted this story, but the odds favor them moving in this direction. The simple fact is that the Fed reacts systematically to a changing forecast. Financial markets are signaling the the growth forecast will worsen enough, or that the risks to the growth forecast will become sufficiently one-sided, that the Fed will have to act."

Flashback: Two rate cuts, or a reduction of the Fed funds rate by 50 basis points, is exactly what Trump's economic adviser Larry Kudlow told me the White House wanted back in March.

Go deeper: Trump's Mexico tariffs mark a declaration of isolationism not seen since the 1940s

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