Fed Rate Cuts Expected Soon
Recent unexpectedly high readings on consumer and some wholesale prices have prompted markets to reassess the Federal Reserve's approach to interest rates ahead of its September meeting. The likelihood of a smaller, more cautious rate cut has increased, while a larger cut could significantly impact stock markets.
As of Thursday, the probability that the Fed will reduce rates by 50 basis points next week dropped to 15%, a notable decrease from the previous week's 44%, according to the CME FedWatch Tool.
Analysts suggest that a 25 basis point cut would be a more prudent move for the Federal Reserve. Eric Wallerstein, chief markets strategist at Yardeni Research, believes the Fed is unlikely to cut by more than 25 basis points unless recessionary conditions or a financial crisis arise.
"For those advocating for a 50 basis point cut, I recommend reconsidering the potential volatility such a move would introduce in the short-term funding markets," Wallerstein stated in an interview with Yahoo Finance. "The Fed is unlikely to take that kind of risk."
Supporting Wallerstein’s perspective, the latest jobs report indicated a slowdown in the labor market but did not show the significant cooling necessary for the Fed to justify a deeper cut. A considerable decline in job market health could signal an impending recession.
Additionally, Wednesday's Consumer Price Index (CPI) report revealed that core prices, excluding volatile food and energy costs, rose by 0.3% in August, surpassing Wall Street expectations of a 0.2% hike.
Oxford Economics' deputy chief US economist, Michael Pearce, observed, "The concerning news surrounding inflation will temporarily divert attention from the Fed's renewed emphasis on the labor market and increases the likelihood that officials will adopt a more cautious stance, beginning with a 25 basis point cut next week."
Some analysts on Wall Street warn that a 50 basis point cut might convey a more troubling message about the US economy than the Federal Reserve intends. Jennifer Lee, a senior economist at BMO Capital Markets, expressed concern: "A 50 basis point cut would suggest panic, indicating we are lagging behind on addressing economic challenges."
