In what seems like the longest-awaited rate cut, the Federal Reserve is positioning investors to prepare for a possible interest rate cut in September. At Wednesday’s meeting, the FOMC kept its interest rate steady. However, it hinted that monetary policy is likely in September.
Bond markets reacted swiftly, falling first but then rebounding. Yields for the 10-year T-bill, 2-year, and 30-year ended the day higher. This suggests that the debt market is not 100% convinced that the Fed will lower rates.
Despite the bond market’s reaction, the Fed appears content with the direction of inflation. However, it is waiting for inflation to continue to cool down. This Friday, the BLS will release the job report. Another strong report would undermine the Fed’s bias toward cutting rates.
Stock markets resumed their upward trend. The S&P 500 (SPY) found support at the 50-day simple moving average, rising by 1.63% on Wednesday. It seems almost unrealistic that stocks would trade at all-time highs while the Fed considers lowering rates.
Risks
The ECB cut rates in June and then watched an uptick in inflation. In the U.S. the Fed risks relying on an inaccurate CPI report and PCE data. Utility costs, insurance, and housing costs are higher than the inflation report suggests. Cutting rates might re-accelerate inflation in those items.
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