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Investing.com - Just as a semblance of peace appears to be breaking out in the Middle East, could a “war” be breaking out at the Federal Reserve? Macquarie examines.
Markets appear to be taking U.S. President Donald Trump at his word regarding the cease-fire between Iran and Israel (and the U.S.), said analysts at Macquarie, in a note dated June 24.
A ceasefire was made easier to believe in by the so-called "proportional response" that came from Iran - a ’symbolic’ attack on the U.S.’s naval base in Qatar, by which no one was injured, and adequate early warning was given.
“We suspect that so long as Trump is pushing for a ceasefire and de-confliction, traders will operate as if there is a ceasefire in place or coming, because this is Trump’s way of obliging the parties to that ceasefire,” Macquarie said.
And, importantly for the global economy, we’re reasonably assured that even if the overflights of missiles and planes between Iran and Israel do continue despite the ceasefire, Iran is unlikely to attack the U.S. again or to disrupt the flow of oil purposely or without provocation from the U.S..
Trump also seemed to dissuade "regime change" in Iran, thus diminishing the prospect that Iran will devolve into social instability or chaos, for now, the bank said.
The combination of Iran’s "proportional response" yesterday, and the prospect that Iran will not disrupt the flow of oil has led to large declines in the price of a Brent crude barrel.
“We caution, however, that a ceasefire is far from a peace. Iran may try to rebuild its nuclear capabilities later, which could invite another intervention from Israel or the U.S,” Maquarie added.
For U.S. policymakers, the decline in the price of oil could reduce the risks that would have otherwise delayed a rate cut.
The benefits of lower oil prices aside, some Fed officials have already taken to the pulpit to argue for lowering policy interest rates soon.
Indeed, two ostensible ’hawks’ have said that a near-term cut is justified. Board member Chris Waller said on Friday that the FOMC could cut the Fed Funds rate target as early as the July meeting, and earlier this week Michelle Bowman said that she is open to cutting the policy rate as soon as the July meeting if inflation pressures stay contained.
“What’s notable here is that Waller and Bowman are both considered to be ’hawks’, but they are also both appointees of Trump’s. It has crossed our minds, therefore, that both Fed officials are simply effectively angling for the job of Fed Chair once Jay Powell is gone, by putting themselves in the camp of rate cutters,” analysts at Macquarie said.
But their comments imply also that the July meeting is "in play" for a rate cut. This has been enough to move the USD OIS market more than just marginally. After Powell’s presser the implied probability of a July rate cut was still less than 10%, but it has now risen to just under 25%.
“To be sure, not everyone on the FOMC is likely to be on the same page yet, but even if there were no political motivations at work in FOMC decision-making and dissenting, the FOMC would still be drifting toward a rate cut, and would nearly certainly have cut in June had it not been for the uncertainty surrounding tariffs,” the bank said.
For now, therefore, it seems that July’s meeting will be characterized by a ’dovish hold’ - i.e., a decision to hold that has perhaps one or two "allowed" dissenters and a fair amount of debate around the net effect of tariffs on inflation, Macquarie added.
