Expect rate cuts to wait till Fed thinks they're essential: Don Pittis

If you're a Canadianhoping for a reductionin interestthis weekto take a little weight off heavy loan payments, you will probably have to hang on a little longer.

Few expect U.S. Federal Reserve chair Jerome Powell to announce interest rate cuts at his monetary policy press conference on Wednesday.

But despite a U.S. economy that's still growingand North Americanunemployment that remainsat record lows, a lot of people, including U.S. President Donald Trump,have been hoping for interest rate cuts this year. In fact, some market indicators anticipatethree quarter-point cuts in 2019. They may be disappointed.

Certainly market analysts of all kinds will be examining Powell's every nuance hinting when the next cut might be coming.

With signs of trouble brewing in the Gulf of Hormuz wherethe U.S. last weekblamed Iran for attacks on shipping and with continuing trade squabbles between the U.S. and three of its biggest trading partners, the economic future is at least as hard to predict as ever and maybe more so.

A survey of economists by the Wall Street Journal showed most are convinced the next rate move by the Fed will be down, not up.

Recently there has been widespread fear the hot U.S. economy is coming off the boil and actually may soon be helping to nudge the world into recession. While much disputed by those who say,"It's different this time,"inverted yield curve data in Canada and the United Statespoint to growth going negative as soon as 2020.

Cutting interest rates is exactly what central banks do to boost a sagging economy. But there are good reasons to expect that Powell will not cut just to prop up markets or to make Trump happy. When his turn for a rate decision comes in July, it is reasonableto think Bank of Canada governor Stephen Polozwill also be cautious.

If Powell fails to make sharp cuts ininterest rates this year, he will be flying in theface of both the president and of futures market predictions. On the other hand he will be acting with the backing of some very powerful market players.

As of Friday, prognostications derived from Fed funds futures market show an 18 per cent chance of a cut this week. But that rises to 83 per cent in July and continues to climb during the year to 98 per cent by December.

Another way of examining the futures data seems to predict U.S. rates as low as 1.75 per cent by the end of the year, which implies three quarter-point rate cuts by the Federal Reserve in 2019.

Depending on data

Interestingly, two big U.S. market players, UBS and Goldman Sachs, say the futures markets have it wrong.

"We believe it would take a recession to provoke the magnitude of rate cuts currently being priced by the market, and this remains unlikely in our view," said an economist report from UBS wealth management. A senior Goldman spokesmanexpressed similar skepticismin a CNBC interview.

Of course that does not mean the Fed would not respond to aeconomic disruption much milderthanPowell's predecessor Ben Bernanke faced in 2008. But of course with interest rates just over two per cent now, Powell has much less room to cut before hitting zero, where everything becomes more complicated.

While most economists say a trade war will cut into growth, there are wide differences in estimates ofhow big the impact will be and when it might hit. A sharp risein energy prices and a boost in military spending caused by Middle Eastsabre-rattling could have the opposite effect.

As Trump keeps insisting,Powell has room to cut. Inflation remains tame. And there would be positive effects for parts of the economy. Interest rate cuts push markets higher almost immediately, which would make people who own stocks (and real estate) happy.

Any deeper economic impact would be much slower and more uncertain. With rates as low as they alreadyare, and in the current climate, it's unclear how many business investors would would be convinced to borrow to expand just because of slightly lower rates. And that rate cut would take months or years to become apparent in the wider economy.

Even if the U.S. economy continues to weaken slowly, the question Powell and his committee may be asking themselves is how to get the biggest bang for their rate-cutting buck.

After the longest economic expansion in U.S. history, Powell, and Poloz too, might be inclined not to waste a few cuts here and there to cheer up markets and keep people like Trump calm, instead saving the small amount of cutting room they havefor when the long expansion actually ends.

Follow Don on Twitter @don_pittis