Stocks rally, bond yields plunge as Fed fuels rate cut hopes

Jerome Powell speaks at a conference involving its review of its interest-rate policy strategy and communications in Chicago. On Wednesday June 19 the Federal Reserve releases its latest

The Fed kept its benchmark rate - which influences many consumer and business loans - in a range of 2.25% to 2.5% despite the president calling for a "level playing field.' In its statement Wednesday, the Fed removed a reference to being 'patient" about adjusting rates.

Even policymakers who did not write down a forecast for a rate cut this year believe "that the case for somewhat more accommodative policy has strengthened", Fed Chairman Jerome Powell said in a news conference following the meeting. It remains unclear when that might happen. Will Trump's trade wars be resolved before they inflict real damage on the economy? Will inflation finally edge close to the Fed's target level?

The Federal Reserve's policymakers were divided over whether the central bank will vote to lower borrowing costs by the end of 2019.

Meanwhile, Fed chairman Powell on Wednesday responded to a reporter's question about whether he could be demoted by the president for not cutting rates fast enough - which could constitute interference by the executive branch and a threat to the central bank's authority.

"I think it's right in line with market expectations, puts a July cut in play", said Brett Ewing, chief market strategist at First Franklin Financial Services in Tallahassee, Florida.

Complicating the timing of possible rate cuts is an escalation of attacks on the Fed by Trump as he gears up for his 2020 re-election campaign.

The bond market had a more pronounced reaction to the Fed's statement.

Tuesday saw Trump launch his official re-election campaign, and he knows if the economy is sagging when Americans go to the polling booth he might be in trouble: Trump is again making the economy central to his campaign.

In a note to clients, Otunuga said that he is bullish on gold and sees prices pushing to $1,400 an ounce in the near-term; however this weekend's Group of 20 meeting, a gathering of leaders and central banks of the 20 largest countries in the world, could create some volatility in the marketplace.

This is a political move by Trump, and while markets might see little chance of Powell going in the near-term, markets know full well that the U.S. President does not shy away from taking unconventional decisions and they will therefore be wary over coming months. But under the law, a Fed board member, like Powell, can be fired only for cause.

When it was all over, the trading day ended with minor gains for the three major US indexes.

"You'll notice that the statement was not all that downbeat on growth but did highlight weak inflation and uncertainties about the outlook", wrote Neil Dutta, head of US economics at Renaissance Macro Research, LLC, in a note to clients shortly after the June statement was released. Inflation is soft. And there are trade concerns.

Oil prices held firm, underpinned by a larger-than-expected decline in USA crude inventories. The index reflects manufacturing conditions in the state. Trump also said that before his meeting with Xi, negotiators for the two sides will resume talks.

USA money market derivatives, such as Fed funds futures and overnight indexed swaps, are fully pricing in a rate cut of 25 basis points at next policy review on July 30-31, with about one-third chance of a bigger 50 basis point cut.

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