Anika Begay
Heading into this week’s inflation reports, the question wasn’t whether the door would be open for interest rate cuts, but rather whether the Fed would choose to creep in or hurry. After the CPI and PPI data, the issue seems to have cleared up, if only a little: Markets are now expecting a better chance of a quarter-percentage point cut in September, but are still considering something more aggressive. Commentary following the second of the two releases, the CPI, indicated that the Fed is still weighing the variables, but is more likely to start slowly. “While there is still plenty of time to prove otherwise, we don’t believe today’s data indicates an urgent need to cut 50 basis points in September,” said Lauren Goodwin, chief market strategist at New York Life Investments. “Economic momentum is slowing, but signs that we’re already in a recession, such as a significant increase in jobless claims or a deterioration in the business outlook, aren’t flashing red yet.” On the more cautious, less urgent approach, traders in the federal funds futures market placed about a 56% chance that the Fed would opt for the quarter-point, or 25 basis point, move at its Open Market Committee meeting on Sept. 17-18, according to calculations by CME Group. Stock markets weren’t thinking much either way. After Tuesday’s sharp rise in a producer price index that rose just 0.1% in July, major averages were modestly higher after the consumer price index pointed to a 0.2% monthly gain and an annual rate of 2.9%, the lowest since spring 2021. On the bond front, long-term yields were mostly lower, but the policy-sensitive 2-year note was little moved. US2Y .SPX 5D line Yields and Stocks Overall, a market that expected the Fed to step off the stick and start easing policy soon was still taking it all in. A Fed reluctant to move could face a sharp market reaction, but deeper rate cuts could signal gloomier things, said Liz Ann Sonders, chief investment strategist at Charles Schwab. “A more significant deterioration in the labor market than we’ve seen could trigger a more hawkish stance,” Sonders said. “Be careful what you wish for in the hope that the Fed will move more aggressively. History shows that a fast versus slow cycle of cuts does not reward stocks.” Current futures prices suggest the September cut would be followed by a 50-basis-point move in November and another 25-basis-point reduction in December. However, the price of federal funds futures has been even more volatile than usual this year, and the market now seems more concerned that the Fed is acknowledging a potentially deteriorating labor market. “I worry that the Fed is basically fighting the last war,” said Tani Fukui, a macroeconomist at MetLife Investment Management. “The last war on inflation was in 1980, when inflation was something like 15%.” With prices for basic personal consumption expenditures heading toward 2%, “This is a whole different world, and I think we’re overthinking it.” Fukui noted the rising unemployment rate and its potential to trigger recession indicators, though she doesn’t think the economy is in a full-blown contraction yet. “It’s not something I would play with in the interest of perfection on the inflation side,” she said. “A one-time aggressive cut of 50 basis points would go some way to alleviating some of that pressure.”
