July 26, 2019 / 2:03 PM / 4 months ago

MONEY MARKETS-U.S. Q2 GDP data buoy bets on 25-bps rate cut

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NEW YORK, July 26 (Reuters) - U.S. interest rates futures fell on Friday, erasing earlier gains, as data showed the American economy slowed less than expected in the second quarter, supporting bets the Federal Reserve would cut interest rates by only a quarter point next week.

The Commerce Department said gross domestic product grew at a 2.1% annualized pace in April to June, down from a 3.1% rate in the first quarter. But its first or advance reading on second-quarter GDP beat the median forecast of 1.8% among economists polled by Reuters.

The pullback in inventory and exports in the second quarter was offset by robust consumer spending.

The details of the latest GDP report will likely lead Fed officials to decide that a quarter-point rate decrease next week may be enough for now to preserve the current economic expansion, which is the longest on record.

Fed Chairman Jerome Powell and other policymakers have signaled in recent days the central bank is ready to act due to risks from trade conflict and softening global business activity.

“The net on this is that, given the Fed’s global reasons to ease and that market strength and hence consumption are similarly built on the expectation of lower policy rates, the Fed has no option other than to cut 25 (basis points) on Wednesday and see whether the data unfold to create the need for a further cut in September,” Steve Blitz, chief U.S. economist at TS Lombard, wrote in a research note.

At 9:43 a.m. (1343 GMT), federal funds futures implied traders saw about an 81% chance the U.S. central bank would embark on a quarter-point rate decrease to 2.00%-2.25% at its July 20-31 policy meeting. This was higher than the 77% probability seen shortly before the release of the advance gross domestic product data for the second quarter.

Fed funds contracts still suggest traders expect possibly two more rate cuts before year end, if the Fed cut rates by a quarter point next week.

Reporting by Richard Leong; editing by Jonathan Oatis

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