After Wednesday’s higher-than-expected inflation figures, markets quickly priced in the possibility that the Federal Reserve would choose to cut interest rates modestly at its September meeting.
The market sold on expectations that the Fed will not cut interest rates by 50 basis points, contrary to some expectations. The S&P 500 (^GSPC) and Dow Jones Industrial Average (^DJI) both fell more than 1.5% within two hours of the news, then pared some losses later.
But some strategists argue that a 25 basis point rate cut is a more welcome sign from the Fed.
Eric Wallerstein, chief market strategist at Yardeni Research, reasoned that the Fed is unlikely to cut rates by more than 25 basis points “barring a recession or a financial crisis.”
“I think anyone who is calling for a 50 basis point (bp) cut should seriously reconsider how much volatility they are causing in the short-term funding market,” Wallerstein told Yahoo Finance. Ta. “It’s just that the Fed doesn’t want to take the risk.”
Wallerstein noted that although the latest jobs report shows continued signs of a slowdown in the labor market, economists are primarily concerned that the August jobs report will prompt another Fed rate cut. The authors infer that the significant cooling that many believe is necessary has not yet become evident. The same was true for the Consumer Price Index (CPI) in August, which showed price growth at its lowest annual rate since the beginning of 2021.
But the report details that on a “core” basis, which excludes more volatile food and gas prices, prices rose 0.3% in August from the previous month, beating Wall Street’s expectations for a 0.2% rise.
“The unfavorable news on inflation distracts somewhat from the Fed’s renewed focus on the labor market, as officials stick to a more cautious easing approach, starting with a 25 (basis point) rate cut next week,” said Oxford Economics Secretary. It’s going to be more likely.” U.S. Chief Economist Michael Pearce wrote in a note to clients on Wednesday.
Further clues as to what the Fed’s rate-cutting cycle will look like will come in September, when the Fed releases a summary of its economic forecasts that includes a “dot plot” that charts policymakers’ expectations of what interest rates will be. You’ll get it on the 18th. It may be possible in the future.
As of Wednesday morning, markets expected the U.S. Federal Reserve to cut interest rates by 100 basis points this year. But Wallerstein reasoned that even if the Fed’s total rate cuts this year were lower than the market expected, that wouldn’t necessarily be bad for stocks.
“Growth is stronger than expected, GDP in the third quarter is strong, labor market indicators are not too bad, and consumer spending continues to grow, so if interest rate cuts are factored in, stock prices will be further affected. There’s room to continue as revenue continues to grow,” Wallerstein said.
