The big question with the Fed is whether it will carry out a policy move this week. 25 basis point reductionas expected by part of the market, or 50, as provided for in another. The bets are divided and tight and the market reaction will not be the same, of course, depending on whether one decision or another is taken.
Investors are expecting a rate cut on Wednesday, when the Fed concludes its September meeting with an announcement.
A long-awaited rate cut
After raising interest rates for the first time in March 2022 to combat rising inflation, the Fed gradually increased its federal funds rate to 5.25%-5.5%, the highest levels in 23 years.and kept them there for more than a year. Now, with inflation slowing and signs that the labor market is weakening, the Fed is expected to cut interest rates for the first time in four years.
Investors will therefore be listening closely to Powell for clues about the Fed’s upcoming monetary policy decisions and its outlook for the economy.
On Tuesday, August retail sales data will provide Fed officials with insight into consumer spendingwhich accounts for roughly two-thirds of U.S. gross domestic product (GDP). Retail sales surprised in July as resilient consumers continued to defy economic forecasts.
Market watchers will also receive several housing data points this week, including existing home sales, residential construction starts and homebuilder confidence.
The data that analyzes the market
Former New York Fed Governor, William Dudley said late last week that if he were still a member of the Committee, he would push for a 50 basis point reduction.
The Kathleen Brooks, head of research at XTBacknowledges that the Fed’s decision this week “is in a delicate balance between a 25 and a 50 basis point cut” and refers to an article by Nick Timiraos, a journalist for ‘The Wall Street Journal’ and considered one of the closest to the Fed, which tipped the balance towards a 50 basis point cut. In this article, the journalist refers to the Federal Reserve’s great dilemma about whether to start with a large reduction or a small one.
“The Fed has already indicated that is willing to make several interest rate cuts as the labor market cools“However, the debate appears to have shifted and the Fed is becoming more nervous about keeping interest rates too high for too long, for fear that a soft landing will slip through their fingers,” Brooks notes.
“A 50 basis point cut this week would be a bold moveHowever, if the Fed signals that it will cut rates earlier, there could be fewer cuts later, which could surprise the market and weigh on risk sentiment,” acknowledges the XTB expert.
The market still expects the Fed to cut rates by 25 basis points on Wednesday, but the probability of a move rose to 50 basis points late last week. The chances of the former being realized stood at 57% and the latter at 43%, according to the CME’s Fedwatch tool.
A rise in expectations of a 50 basis point cut has weighed on the dollar, which fell across the board at the end of last week, with the biggest losses recorded against the yen. USD/JPY hit a new low below 141.00 and is at its lowest level since 2023.
For its part, Gold reached new all-time highs at the end of last week. which moves inversely to US interest rate expectations. “Gold is the ultimate hedge against inflation, so it has received a boost from the prospect of a 50 basis point cut by the Fed,” she explains.
Source: Ambito
