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Wall Street ratchets up chances for 'precautionary' Fed rate cut

WASHINGTON , June 19, 2019 -- U.S. Federal Reserve Chairman Jerome Powell speaks at a press conference in Washington D.C., the United States, on June 19, 2019. The U.S. Federal Reserve on Wednesday left interest rates unchanged as officials weighed mixed signals on the health of the U.S. economy and the impact of trade tensions. (Photo by Ting Shen/Xinhua via Getty) (Xinhua/Ting Shen via Getty Images)

A growing number of Wall Street analysts are banking on the Federal Reserve cutting rates at least twice this year — and perhaps as early as July — following the central bank's dovish policy statement on Wednesday.

The Fed left the target rate for funds unchanged at 2.25%- 2.5%. Yet Fed Chairman Jerome Powell indicated the central bank was prepared to do whatever was “appropriate to sustain the expansion” as the U.S. economy shows signs of fatigue, and the U.S.-China trade dispute drags on without resolution.

The not-so-subtle hint put investors in a buying mood — which sent major stocks on a tear. In Thursday’s trading, the S&P 500 (^GSPC) soared to a record intraday high, while the Dow (^DJI) rallied over 120 points and the Nasdaq (^IXIC) rose more than 30 points.

For months, Treasury bond yields have been sending markets a signal that the economy could be set to turn down — making the Fed Open Market Committee’s (FOMC) message timely. And with Wall Street’s top analysts saying the central bank could act as early as July, here’s how some of them greeted the Fed’s decision:

Deutsche Bank:

“The dovish tone from the June FOMC meeting was consistent with our expectations and supports our existing call for three 25bp rate cuts this year, with the first coming in July,” wrote Deutsche Bank (DB) analysts in their economic report.

UBS sees a half-point cut

“The FOMC statement and presser point to 50 bps in cuts—probably July… Pushing things off past July is clearly possible if we get our forecast. But the shift in sentiment makes July seem more likely,” UBS (UBS) analysts wrote.

Barclays sees ‘precautionary rate cuts’

“Powell was careful to say the committee sees the economy as likely to remain in an expansion phase, boosted by growth of household spending and still-healthy labor market conditions… this has all the hallmarks of precautionary rate cuts,” Barclays’ (BCS) analyst wrote.

JPMorgan yanks forward expectations

“After we penciled in cuts last month for the September and December meetings we noted the risks skewed for more cuts and sooner… we are pulling forward our expected cuts to July and September,” wrote JP Morgan (JPM) analysts.

Goldman Sachs moves up timetable

“We now expect cuts in July and September, as well as an end to balance sheet runoff in July. Our base case is for moves in 25 [basis point] increments, but a 50bp cut is possible if the news flow disappoints and/or Fed officials feel compelled to get ahead of bond market pricing,” wrote analysts from Goldman Sachs (GS).

Wells Fargo cites ‘dot plot’ change

“The change in the dot plot reinforces our view that the Fed will indeed be cutting rates soon. In that regard, we expect that the FOMC will cut its target range for the fed funds rate 25 bps at its next meeting on July 31,” Wells Fargo (WFC) analysts wrote.

BofAML: Watch jobs, manufacturing

“We believe this is largely consistent with our forecast for the Fed to cut a total of 75bp… Our baseline is for the Fed to begin cutting in September… if we get another weak payroll report, disappointing ISM surveys and a bad outcome from the G20, the Fed will likely be inclined to cut in July,” BoFAML (BAC) analysts wrote.

Donovan Russo is a writer for Yahoo Finance. Follow him @Donovanxrusso.

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