The recent step up in the markets implied probability of a 50 basis point cut this week, rather than 25 bps, has made it the most likely outcome in traders’ opinion.
It was not a function of new data or a changed view of the Federal Reserve’s risk mitigation mindset.
Rather, it’s…— Mohamed A. El-Erian (@elerianm) September 16, 2024
The Consumer Price Index report released Wednesday showed that inflation cooled in August to its lowest level since early 2021. The annual pace of price increases slowed to 2.5%, down from 2.9% in July. Core inflation, which excludes volatile food and energy prices, held steady at the same level as July.
Impact of Fed rate cut on stock market: DECODED by Nikunj Dalmia | Editor's Takehttps://t.co/pfr0VOpzov
— ET NOW (@ETNOWlive) September 18, 2024
The inflation data is likely to keep the Federal Reserve on track to cut interest rates by a quarter percentage point at its meeting next week. Some on Wall Street had been hoping for a larger half-point cut, but the stickiness of core inflation, particularly in housing costs, makes that unlikely. Given the stickiness of services inflation, the Fed will likely cut by 25 basis points in the upcoming meeting and reserve the potential for more aggressive action later this year if we have further deterioration in the job market,” said Jeffrey Roach, chief economist for LPL Financial.
Following the CPI report, investor bets on a quarter-point rate cut rose to 85%. Fed officials, including Chair Jay Powell, have recently signaled that the time has come to begin lowering rates.
Inflation data prompts modest Fed response
Editor's Take | There's a debate brewing—will the Fed cut rates by 25 bps or 50 bps? For the first time post-COVID, a rate cut is on the table. Should the Fed start slow or make a strong move and ease later? What will be the short-term market reaction?
Here's the editor's take!… pic.twitter.com/Mwj844dMVi
— ET NOW (@ETNOWlive) September 18, 2024
Stock Market Fear & Greed Index climbs to 51, the highest reading since September 3 ? pic.twitter.com/HPhPQImTvf
— Barchart (@Barchart) September 16, 2024
The central bank is now focusing more on the labor market, with Powell noting that they do not “seek or welcome further cooling in labor market conditions.”
Analysts believe the August jobs report was not weak enough to justify a half-point rate cut. However, if the job market weakens further, the Fed could consider larger cuts in the future. For now, with inflation slowly moving down and the job market cooling but not pointing to recession, the Fed is likely to lay out a measured path of quarter-point rate cuts for the remainder of the year.
Stocks initially dropped sharply following the CPI report before staging a comeback. The Dow Jones Industrial Average erased a 700-point decline to close higher, while the S&P 500 and Nasdaq also reversed their losses. Low interest rates are generally favored by investors as they enable cheaper borrowing for companies, which can boost profitability.
Market sentiment remains cautious ahead of the Federal Reserve meeting, with additional uncertainty stemming from political developments such as proposed corporate tax increases. However, Wednesday’s market rebound showcased the resilience of traders amid fluctuating conditions.
