Recent economic data indicating unexpectedly high consumer and wholesale prices have stirred up discussions regarding the actions the Federal Reserve may take in its upcoming meeting. While some investors have considered the possibility of a larger interest rate cut, financial experts caution that an unexpectedly large reduction could upset the stock market.
As of Thursday, there has been a notable shift in market sentiment, with the likelihood of the Fed implementing a 50 basis point rate cut decreasing to 15%, down from 44% the previous week, as reported by the CME FedWatch Tool. The majority of investors now expect a more cautious reduction of 25 basis points.
Eric Wallerstein, Chief Markets Strategist at Yardeni Research, mentioned, “For those advocating a 50 basis point cut, I believe they should think carefully about the volatility it could induce in short-term funding markets. It’s not a risk the Fed wants to take.”
Economists point out that a modest cut would better align with the existing economic climate without overreacting. Jennifer Lee, Senior Economist at BMO Capital Markets, remarked, “A 50 basis point cut would seem like a frantic move, indicating we are lagging behind the economic curve.”
Past data supports a more cautious stance. Nicholas Colas, co-founder of DataTrek, reviewed historical rate-cut cycles since 1990 and observed that when the Fed initiated cuts with 50 basis points in 2001 and 2007, recessions followed shortly after. “Chair Powell and the Federal Open Market Committee are aware of this history. Their initial cut will most likely be 25 basis points,” Colas stated.
The latest Consumer Price Index (CPI) data revealed that core prices increased by 0.3% in August, which was slightly above what analysts anticipated. Michael Pearce, Deputy Chief U.S. Economist at Oxford Economics, said, “This disappointing inflation news is likely to divert some attention from the Fed’s renewed emphasis on the labor market, making it more probable that officials begin with a prudent 25 basis point cut next week.”
Market participants are keenly observing the impending Federal Reserve meeting on [Insert Date], where additional details will emerge through the Summary of Economic Projections and the “dot plot,” showcasing policymakers’ forecasts for future interest rates.
Eric Wallerstein added, “If rate cuts get dismissed because growth exceeds expectations and GDP figures are robust for the third quarter, alongside favorable labor market indicators and ongoing consumer spending growth, it would give stocks the potential to rise as earnings continue to progress.”
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