The Fed got as dovish as it could get today without actually cutting short-term rates.

The Fed's next meeting is at the end of July. If by that time the Trump Administration has made noticeable progress on a trade deal with China (without backsliding on other trade relationships)

and inflation has picked up relative to the Fed's expectations, then a rate cut might not happen; otherwise a rate cut is more likely than not in July.

Right now, the futures market in federal funds puts a stunning 100% likelihood on a July rate cut. We think that's too high, but a 70% likelihood seems about right. The reason a rate cut is now more likely than not is that the Fed is focused on bringing its preferred measure of inflation – the deflator for personal consumption expenditures (PCE) – back up to an average of 2.0% versus the current level of 1.5%.

The Fed made an important change to its economic forecast. It's now projecting a 1.5% increase in PCE prices this year versus 1.8% back in March. PCE prices are expected to grow 1.9% in 2020 versus a March forecast of 2.0%. Notably, it's not showing any year with inflation above 2.0%.

The reason that's significant is that the Fed describes its 2.0% inflation goal as "symmetric," which means it wants to see an average pace of 2.0% inflation over time, with periods of inflation below 2.0% (like we're in now) offset by periods when inflation runs above 2.0%. The goal of averaging 2.0% inflation means the Fed has given itself room to cut rates based on inflation data alone, even if the US strikes a deal with China.

Superficially, the Fed's "dot plots" suggest no rate cut this year, but that projection dangles by a thread. Of the seventeen Fed policymakers who made projections, one showed a 25 basis point rate hike and eight showed no change at all. In other words, the shift of even one more official toward rate cuts would have made a rate cut the median outlook. Eight policymakers already project a rate cut, with seven of them showing 50 bps in cuts by year-end. Notably, the median forecast for the federal funds rate at the end of 2020 is now 2.125% versus a prior estimate of 2.625%. The median projection for the longer-run average rate is now 2.50% versus a prior estimate of 2.75%.