At the conclusion of tomorrow’s Federal Reserve meeting, another rate cut will likely be announced. The CME’s Fedwatch Tool is showing a 97.5% chance of a rate cut occurring, a near certainty in the market’s eyes.
If all goes as expected, the new target rate for central banks will be 150-175 basis points, when just three months ago the target rate was 225-250 basis points. This October decrease will mark the third consecutive rate cut after raising rates to begin the year.
Key takeaways from these meetings recently have come from Fed Chairman Jerome Powell’s press conferences after the announcements are made. This time around the market will watch for clues revealing what is to come in the next few months.
Many economists expect the Fed to pause their rate-cutting for the foreseeable future, but will want reassurance that the Fed is willing to act if necessary going forward. With unstable market conditions and news from Washington changing daily, the market wants the Fed in a ready-to-act state as change hits the markets.
On one hand, this could be a benefit for equity markets that the Fed can quickly react when needed, lessening the impact of any significantly negative event. However, this also expands the scope of the Fed’s responsibilities in a historical sense.
Traditionally, the Federal reserve tried to operate independent of markets, only acting when the underlying economy needed a spur of investment. Recently however, the Fed seems to be taking cues from both the White House and the performance of the S&P 500. This may be good for investors in the near term as it keeps money cheap and forces people into the stock market as they search for a return.
A negative side effect of current Fed actions might be a powerless Fed if the country falls into a deep recession. With such low interest rates considering the strong shape of the economy, low unemployment and decent hourly wage growth, the Fed could lose some of its power should the economy turn. One only needs to look around the world to see the next step in the rate-cutting process: negative interest rates.
While tomorrow’s report should not be exceptionally impactful, it will be important to listen to Powell’s message after the announcement. With the summer’s abrupt turn of course to resume rate cuts, there is reason to question where policymakers are taking interest rates. Traders should have a plan in place to protect them from a surprise rate announcement as well as a change of language from the Fed about their future.
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