On Tuesday, traders maintained their predictions that the Federal Reserve will commence an anticipated sequence of interest rate reductions with a half-percentage-point descent on Wednesday, a belief that could in turn pressure central bankers to act accordingly.
Futures linked to the Fed policy rate as of Tuesday morning indicated roughly a two-thirds probability of a more substantial cut, contrasted with a one-third likelihood of the more conservative 25 basis-point decrease still noted by analysts at most major Wall Street firms.
Today marks the beginning of the Fed’s two-day policy setting meeting, with an additional meeting scheduled for early November and mid-December.
Market expectations suggest a total of two half-point reductions along with one quarter-point cut during the three upcoming meetings for 2024, as indicated by rate-futures.
For over a year, the Fed has maintained its policy rate within the 5.25%-5.50% range while attempting to curb high inflation in the economy.
Current inflation stands at 2.5%, and most policymakers believe it is on track towards the Fed’s target of 2%. In the meantime, the unemployment rate climbed to 4.2% last month. Almost all Fed policymakers recognized as early as July that it would soon be necessary to start reducing rates to prevent excessive economic slowdown.
Up until late last week, traders favored a quarter-point reduction to kick off the series, but shifted towards a preference for a half-point cut following reports from the Wall Street Journal and the Financial Times late Thursday that suggested a larger rate reduction remained a possibility.
Since that time, market expectations have solidified, making minimal movement on Tuesday despite government reports revealing that U.S. retail sales unexpectedly increased in August, alongside a rebounding manufacturing sector, indicating that the economy is still robust.
Nevertheless, analysts have speculated that the previous week’s news reports were influenced in part by guidance from the central bank. The lack of significant counterarguments from the Fed since then has only strengthened those beliefs.
“As time progresses without any evident effort from the Fed to challenge market pricing that has shifted to favor a 50 basis point cut at the September FOMC meeting, we reaffirm our belief that the Fed is likely to cut by 50 though it remains uncertain,” stated Evercore ISI’s Krishna Guha, part of the minority of economists who had advocated for a larger rate cut even before last week’s market sentiment change.
With markets now heavily leaning toward a more significant policy easing, he wrote, “it is considerably more difficult to surprise with a hawkish stance than a dovish one, and there is no indication the Fed perceives this as an opportune moment to introduce more (volatility).”
Guha anticipated that a half-point cut might evoke a dissent or two from within the Fed; similarly, a smaller quarter-point cut could lead to dissent as well.
By mutual agreement, Fed policymakers refrain from making public comments on monetary policy or the economy during the ten days prior to a rate-setting meeting.
“We believe the Fed is attempting to adjust course at an unfortunate moment,” remarked SGH Macro Advisors’ Tim Duy. “The blackout period hinders conventional communications, leaving the Fed with a more awkward method of addressing concerns.”
U.S. stocks finished nearly flat on Tuesday, relinquishing earlier gains that had propelled the S&P 500 and Dow Industrial Average to record levels as investors prepared for the first Federal Reserve rate cut in 4-1/2 years.
At one point, the benchmark S&P 500 index reached 5,670.81 during the session, supported by new economic data that alleviated fears of a significant downturn in the U.S. economy.
Recent data from the U.S. Commerce Department revealed an unexpected rise in retail sales during August, as a decline in auto dealer revenues was offset by robust online purchases, indicating that the economy was on stable ground throughout much of the third quarter.
“Expectations were quite firmly established prior to the release of today’s economic data, which generally indicated a growth environment, albeit a relatively slow one,” noted Russell Price, chief economist at Ameriprise Financial Services in Troy, Michigan.
Price mentioned that the magnitude of the cut could either amplify inflation concerns or raise fears that the Fed is lagging in its response to avert a recession.
“What we are witnessing in this afternoon’s trading reflects how we have stepped back from the all-time high … as someone’s going to be let down come tomorrow,” he remarked.
The Dow Jones Industrial Average dropped 15.90 points, or 0.04%, to 41,606.18, the S&P 500 increased by 1.49 points, or 0.03%, to 5,634.58, and the Nasdaq Composite rose by 35.93 points, or 0.20%, to 17,628.06.
