Industry News
A 25 Basis Point Cut is Not Enough! Latest Data Raises Concerns of Economic Weakness, 50 Basis Point Cut Expected in September!
Rate Cuts to Begin in September
At the July FOMC meeting, the FederalReservedecided to keep the federal funds rate target range at 5.25% to 5.5%, in line with market expectations. However, more notable were Chair Powell's hints at a rate cut. He indicated that with the cooling labor market and declining inflation rate, a rate cut in September could be an option.
"The general view of the FOMC is that we are approaching a point where it is appropriate to lower policy rates, but we are not quite there yet." Additionally, Powell mentioned, "If inflation data supports it, the FOMC could opt for a rate cut as soon as September." Powell also noted that the current decline in inflation is better than in 2023 and more widespread. With favorable data, the Fed's confidence in inflation continuing to fall toward the 2% target has increased. The labor market has returned to pre-pandemic levels, strong but not overheated. These factors collectively form the basis for the rate cut discussion.
Market's Optimistic Expectations for Rate Cuts
According to the CME's FedWatch tool, the market expects a 100% probability of at least a 25 basis point rate cut at the September meeting, with a 22% probability of a 50 basis point cut.
Additionally, the market expects the Fed to possibly cut rates by 25 basis points at each of the remaining November and December meetings this year, with about a 2/3 probability of the target rate range being 4.50%-4.75% by year-end, and a 1/3 probability of the target range being 4.25%-4.50%, compared to the current 5.25%-5.5%. This optimistic expectation for rate cuts is also driving a continuous decline in Treasury yields.
The 10-year Treasury yield officially fell below the 4.0% mark, hitting a six-month low, reflecting investors' high expectations for rate cuts.
ISM Manufacturing PMI Falls Short of Expectations
The ISM Manufacturing PMI, a key indicator of U.S. manufacturing activity, fell to 46.8 in July, below the expected 49 and June's 48.5, marking the largest contraction in eight months and indicating significant manufacturing shrinkage.
Additionally, the initial jobless claims for the week ending July 27 reached 249,000, higher than the expected 236,000, raising market concerns about the economic outlook.
Future Developments
A deeper analysis of the economic data reveals that although the inflation rate has significantly dropped from its peak of 7% to 2.5%, indicating reduced inflationary pressure, it still slightly exceeds the Fed's long-term target of 2%.
Powell also warned that the Fed will continue to make decisions on a meeting-by-meeting basis, as reducing policy restrictions too early or too much could reverse the progress made on inflation. Conversely, reducing policy restrictions too late or too little could overly weaken economic activity and employment. The Fed is at a crossroads, and the pressure is undoubtedly significant.
In conclusion, market expectations for a rate cut in September have formed, but Powell's remarks also indicate that the Fed will rely on data to make the final decision.
If inflation and labor market data show that the economy needs more support, the likelihood of a 50 basis point rate cut in September will greatly increase.
It is essential to closely monitor future economic data and the Fed's policy moves to make informed decisions. The Fed's policy choices will have profound impacts on global markets, and the Jackson Hole meeting in August and the September FOMC meeting will undoubtedly be the focus of the market.