As the Federal Reserve weighs its next move on interest rates, inflation data has returned to the forefront of investors’ minds, Market Watch reports.
With the Federal Reserve’s decision on a potential rate cut approaching, market participants are closely watching the release of the consumer price index (CPI) for August, which could influence whether the central bank delivers a larger-than-expected 50-basis-point cut at its September 18 meeting.
A 50-basis-point cut, which would be the largest reduction since the 2008 financial crisis, could signal concerns about a slowing economy. Investors are debating whether such a move would suggest that the Fed sees a recession as more likely than it is comfortable with, according to portfolio manager Keith Buchanan from Globalt Investments.
Recent labor market data has added to the uncertainty. Last week’s report showed that the US economy added 142,000 jobs in August, fewer than anticipated, which reinforced the view of a cooling job market. However, these figures were not enough to provide a clear indication of how aggressive the Fed’s next rate move will be. Wells Fargo economists noted the debate remains unsettled between a 25 or 50-basis-point cut, with a 25-point reduction still a possibility.
The inflation report expected on Wednesday is seen as crucial in determining the Fed’s next step. If inflation comes in lower than expected, it could pave the way for a larger rate cut. Economists from Barclays and BofA Securities are forecasting the annual CPI to decline to around 2.5% to 2.6%, down from 2.9% in July, which would further support the case for easing monetary policy.
However, concerns about a steeper-than-expected economic slowdown led to a selloff in US stocks last Friday, with major indices like the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite experiencing their worst start to September in over a decade. Treasury yields also reflected the uncertainty, with short-term yields falling and the benchmark 10-year rate rising above its 2-year counterpart for the first time since July 2022.
For many investors, the central question is whether a 50-basis-point rate cut would signal a more significant economic downturn. Jay Hatfield, CEO of Infrastructure Capital Advisors, noted that such a cut would likely mean the US is heading toward a recession. He added that Friday’s jobs data, which showed continued economic growth, makes a half-point cut less likely, as the figures are still consistent with a healthy labor market.
In the meantime, market expectations for the Fed’s decision have been fluctuating. Fed-funds futures indicated a 79% chance of a half-point cut at one point last week, only for those odds to shift to a 71% likelihood of a quarter-point reduction. Much of the focus will now be on the August CPI data and Fed Chair Jerome Powell’s remarks at the post-meeting press conference on September 18.
Despite fears of a downturn, some investors are eager for lower interest rates. William Huston of Bay Street Capital Holdings said there is a “real need” for rate cuts, as consumers are spending less and businesses are cutting back on investment. A 50-basis-point reduction, in his view, would be welcomed by the market.
The CPI report on Wednesday will likely play a pivotal role in determining the Fed’s course of action, and the financial markets are poised for volatility as investors await further clarity. Other key economic data, including wholesale inventories, consumer credit, and the producer-price index, will also be released throughout the week, adding to the anticipation.