An interest-rate cut in July isn’t a done deal—keep your eyes on September

The Fed kept interest rates unchanged, as expected, but held the door open for a rate cut in the coming months if the economic outlook for the United States deteriorates. We identify the key takeaways from Wednesday’s decision.

Wednesday’s communication from the U.S. Federal Reserve (Fed) is consistent with our base case expectation of two rate cuts in the next 12 months, beginning in September. It also adds to our conviction that the Fed is primarily concerned that ongoing uncertainty is damaging confidence and, by extension, business investment. It’s also likely that the Fed’s hoping to compile a dossier pointing to economic weakness so that it can credibly cut rates, but we don’t think enough weak economic data prints will present themselves in time for a July cut.

Overall, we feel the information we received from the Fed on Wednesday was more hawkish than the market reaction (or news headlines) implied. 

How Wednesday’s Fed meeting influenced our market views:

  • We remain upbeat about global equities: Proactive rate cuts (i.e., early) have historically benefited the equities space more as opposed to reactive (i.e., late) rate cuts. At this point, we’re still in the “proactive” end of the spectrum.
  • We continue to believe that the U.S. dollar (USD) will remain rangebound, with upside potential. While the Fed has made a dovish pivot, it’s largely priced into the U.S. market¹ and we see substantial scope for global central banks, particularly the European Central Bank and the People’s Bank of China, to engage in more aggressive easing activity in the next month—developments that could offset USD weakness.
  • We believe the Fed will have trouble delivering more rate cuts than what the fixed-income market has already priced in. However, should data deteriorate in the coming weeks, we think there’s scope for the Fed to act sooner and take bolder actions than what’s currently expected.

We have three primary takeaways from the Fed’s statement, forecasts, dot plot, and press conference. 

1 The Fed believes the U.S. economy is still sound, but is worried about risks created by ongoing uncertainty

Fed Chair Jerome Powell repeatedly noted that the outlook for the U.S. economy remains sound, highlighting that wages are rising, jobs are plentiful, and consumer confidence is high.² The Fed’s concerns are related to what he refers to as two specific crosscurrents: trade tensions and global growth. In our view, these are one and the same. The deterioration in global trade activity has been substantially exacerbated by trade tensions and its affiliated uncertainty. Interestingly, when Chair Powell was asked about whether a U.S.-China trade deal would erase his concerns at Wednesday’s press conference, he highlighted that he cared more about the economy’s response to it. We take that to mean that the Fed is far more focused on whether economic activity is deteriorating because of policy uncertainty than the content of the policies. That implies the Fed will be hyper data dependent in the coming months, even if that phrase seems to have exited their more recent communication. We should be prepared for substantial volatility around key economic releases over the next several months.

2 The case for a rate cut in July isn’t clear

At the press conference, Chair Powell made several references to the Fed’s need to “see more” to get a sense of how risks are weighing on the U.S. economic outlook—are they a blip in the road or a sign of more sustained weakness? Critically, he referenced the weak May jobs report (in which only 75,000 jobs were added during the month) and noted that the Fed typically requires three to six months’ worth of data to get a sense of the overall trend.

When asked if the Fed felt there were risks associated with cutting rates too early, Chair Powell suggested they didn’t feel the case for cuts was urgent. He also noted that there hadn’t been any support—save for one individual—for cutting rates at the June meeting. In our view, barring major developments, it’s difficult to see how the majority of the Fed’s voting members could swing from wanting to keep rates on hold in June to supporting a rate cut in the space of six weeks. This has strengthened our belief that the Fed won’t have enough conviction that the U.S. economy is truly in need of stimulus until the September meeting. 

3 Market pricing remains disconnected from the Fed’s outlook

Upon closer examination, we thought the Fed’s dot plot³ held a few important nuggets:

  • The median dot plot is unchanged for 2019 as eight out of the seventeen officials expect to see rate cuts this year, another eight think rates should stay on hold during the period while one believes a rate hike would be appropriate. The median dot for 2020, however, indicated a consensus call for one interest-rate cut. This is completely inconsistent with what the markets have priced in—more than three interest cuts in the next 12 months.¹
  • Seven of the eight Fed officials who believe rate cuts would be appropriate this year suggested two cuts instead of one. In other words, if the Fed were to cut rates, it’s unlikely to stop at one. An easing cycle, per this signal, is likely to comprise at least two interest-rate cuts.
  •  We also noted that the dot plot shows rate cuts are expected to be unwound by 2021, suggesting the Fed isn’t expecting a deep recession, but clearly sees the need for some near-term stabilization. For those of us with longer-term forecasts, this has key implications. 
  • Chair Powell highlighted that Fed officials who didn’t think rate cuts are needed this year noted that the case for cuts had strengthened: We believe this implies the dot plot is more dovish than it initially appears.

The Fed’s economic projections don’t reflect the dot plot

We were surprised by how little the Fed’s economic projections³ had changed. Indeed, GDP and unemployment were revised higher over the forecast period, long-run estimates of growth and unemployment were unchanged, and only core inflation was revised downward (mildly). If all we had received from the Fed on Wednesday were its projections, I would have believed this central bank was neutral to hawkish.

Chair Powell’s dovish tone, accompanied by a little-changed economic forecast, creates a challenge for economists and markets: What is the Fed’s true decision-making function? Is it in flux? The inconsistency, in my own view, will create more volatility in the market and could risk longer-term credibility issues for the Fed. For now, however, Chair Powell can get away with claiming that the Fed’s views are consistent with its base case expectation of a healthy U.S. economy, albeit one that faces significant downside risks. 

1 Bloomberg, as of June 19, 2019. 2 FOMC Press Conference, June 19, 2019. 3 Projections U.S. Federal Reserve, June 19, 2019. 

Investing involves risks, including the potential loss of principal. Financial markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. These risks are magnified for investments made in emerging markets. Currency risk is the risk that fluctuations in exchange rates may adversely affect the value of a portfolio’s investments.

The information provided does not take into account the suitability, investment objectives, financial situation, or particular needs of any specific person. You should consider the suitability of any type of investment for your circumstances and, if necessary, seek professional advice.

This material, intended for the exclusive use by the recipients who are allowable to receive this document under the applicable laws and regulations of the relevant jurisdictions, was produced by, and the opinions expressed are those of, Manulife investment Management as of the date of this publication, and are subject to change based on market and other conditions. The information and/or analysis contained in this material has been compiled or arrived at from sources believed to be reliable, but Manulife investment Management does not make any representation as to their accuracy, correctness, usefulness, or completeness and does not accept liability for any loss arising from the use of the information and/or analysis contained. The information in this material may contain projections or other forward-looking statements regarding future events, targets, management discipline, or other expectations, and is only as current as of the date indicated. The information in this document, including statements concerning financial market trends, are based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Manulife investment Management disclaims any responsibility to update such information.

Neither Manulife Investment Management or its affiliates, nor any of their directors, officers, or employees shall assume any liability or responsibility for any direct or indirect loss or damage or any other consequence of any person acting or not acting in reliance on the information contained herein. All overviews and commentary are intended to be general in nature and for current interest. While helpful, these overviews are no substitute for professional tax, investment, or legal advice. Clients should seek professional advice for their particular situation. Neither Manulife, Manulife Investment Management™, nor any of their affiliates or representatives is providing tax, investment, or legal advice. This material was prepared solely for informational purposes, does not constitute a recommendation, professional advice, an offer, or an invitation by or on behalf of Manulife Investment Management to any person to buy or sell any security or adopt any investment strategy, and is no indication of trading intent in any fund or account managed by Manulife Investment Management. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Unless otherwise specified, all data is sourced from Manulife Investment Management. Past performance does not guarantee future results. 

Manulife Investment Management

Manulife Investment Management is the global wealth and asset management segment of Manulife Financial Corporation. We draw on more than 150 years of financial stewardship to partner with clients across our institutional, retail, and retirement businesses globally. Our specialist approach to money management includes the highly differentiated strategies of our fixed-income, specialized equity, multi-asset solutions, and private markets teams—along with access to specialized, unaffiliated asset managers from around the world through our multimanager model.

These materials have not been reviewed by, are not registered with any securities or other regulatory authority, and may, where appropriate, be distributed by the following Manulife entities in their respective jurisdictions. Additional information about Manulife Investment Management may be found at

Australia: Hancock Natural Resource Group Australasia Pty Limited, Manulife Investment Management (Hong Kong) Limited. Brazil: Hancock Asset Management Brasil Ltda. Canada: Manulife Investment Management Limited, Manulife Investment Management Distributors Inc., Manulife Investment Management (North America) Limited, Manulife Investment Management Private Markets (Canada) Corp. China: Manulife Overseas Investment Fund Management (Shanghai) Limited Company. European Economic Area and United Kingdom: Manulife Investment Management (Europe) Ltd. which is authorised and regulated by the Financial Conduct Authority, Manulife Investment Management (Ireland) Ltd. which is authorised and regulated by the Central Bank of Ireland Hong Kong: Manulife Investment Management (Hong Kong) Limited. Indonesia: PT Manulife Aset Manajemen Indonesia. Japan: Manulife Asset Management (Japan) Limited. Malaysia: Manulife Investment Management (M) Berhad (formerly known as Manulife Asset Management Services Berhad) 200801033087 (834424-U) Philippines: Manulife Asset Management and Trust Corporation. Singapore: Manulife Investment Management (Singapore) Pte. Ltd. (Company Registration No. 200709952G) Switzerland: Manulife IM (Switzerland) LLC. Taiwan: Manulife Investment Management (Taiwan) Co. Ltd. Thailand: Manulife Asset Management (Thailand) Company Limited. United States: John Hancock Investment Management LLC, Manulife Investment Management (US) LLC, Hancock Capital Investment Management, LLC and Hancock Natural Resource Group, Inc. Vietnam: Manulife Investment Fund Management (Vietnam) Company Limited. 

Frances Donald

Frances Donald, 

Global Chief Economist and Global Head of Macroeconomic Strategy, Multi-Asset Solutions Team

Manulife Investment Management

Read bio