Today the stock market is feeling the implications.
This week, the Federal Open Market Committee (FOMC) met to debate the important thing rate of interest, which is currently at a level high for greater than 20 years.
While analysts were largely prepared for no rate cut this month – currently targeted at 5.25 to five.5 percent – they were waiting for a hidden sign that the committee’s next meeting next month would bring such relief.
Wall Street is pushing for a rate cut for a variety of reasons, but the most important concern is that if the Fed cuts rates too late – and thus keeps the cash supply too tight for too long – it could slow consumer spending and business investment spending, stalling the economy and causing unemployment to rise.
On the opposite hand, lower rates of interest would mean cheaper loans and better consumption.
But as an alternative of Powell hinting at a cut within the third quarter, analysts were offered a “small step,” said Stephen Stanley, Santander’s chief U.S. economist.
“Chairman Powell stressed in his press conference that recent inflation data had ‘increased’ the Fed’s confidence that inflation would return to the 2% target, but the Fed is not there yet,” he wrote in a note published by Assets.
While the market had priced in a rate cut for September, Stanley believes the news won’t come until November. “I am skeptical that the key economic data over the next seven weeks will boost FOMC confidence,” he wrote.
Bank of America also doesn’t expect an rate of interest cut until December – even before the Fed meeting in July.
Yesterday, credit strategist Yuri Seliger wrote in a note published by Assets While Powell’s comments were “broadly positive” for a rate cut in September, there was a vital caveat: the timing could be “set on the assumption that there are no major surprises in inflation.”
A day earlier, Seliger’s colleagues – US economist Michael Gapen, rate of interest strategist Mark Cabana and foreign exchange strategist Alex Cohen – wrote: “In our view, the primary message from the July FOMC meeting is that the Fed is moving closer to cutting rates of interest, but first needs more evidence that inflation is under control.
“[Powell] indicated that confidence has grown within the committee that a rate cut could happen in September, but by then data would need to confirm the Fed’s expectations. We think the Fed can be patient and wait for more evidence.”
The less clear indications of a rate cut in September are probably certainly one of the various explanation why the worldwide stock market has suffered such sharp losses in recent hours.
At the time of writing, the S&P500 has fallen 1.4% over the past 24 hours, while the Nasdaq has lost 2.3% over the identical period.
This drop could also be due partly to the lackluster earnings announcement from Magnificent 7 stock Amazon, but investors are also likely feeling a creeping sense that the Fed could also be holding out too long.
“Hedging bets is common practice”
“We haven’t made any decisions yet,” Powell told reporters in a press conference after the FOMC meeting this week. “I don’t know what the data will show or how that will affect the right course of our policy.”
While such an announcement could have taken the wind out of the sails of other analysts, Mike Pugliese, chief economist at Wells Fargo Assets he had a more balanced attitude.
“I am confident that the FOMC will cut rates in September,” he said. “It is true that Chairman Powell and the rest of the FOMC are playing it safe, but that is standard practice in such situations. It would be highly unusual for them to explicitly commit to a rate cut before a plenary meeting.”
“Reading between the lines, the signals were there yesterday and the latest data on the labor market and inflation suggest that a rate cut will be justified at the next meeting.”
The stock market collapse overnight could seem harmless in comparison with the surprise that would occur in September if the rate of interest cut doesn’t occur.
“It’s difficult to speculate on what the impact would be if the Fed did not cut rates in September, since we don’t have the economic data that will be released between now and then,” Pugliese added. “For example, if the employment reports released on August 2 and September 6 are exceptionally strong and the next two CPI reports are also very ‘hot,’ then that would have a different impact than a scenario in which economic data was generally weak up until the September FOMC meeting, but the committee still decided against cutting rates.”
“Given what we now know, a failure to cut interest rates in September would be a big surprise to us and to financial markets. Financial conditions would likely tighten if the FOMC takes an unexpectedly hawkish stance over the next seven weeks.”
At UBS, Brian Rose, leading US economist, stays more cautious in his earlier statement that the market is pricing in “an almost 100 percent chance of a rate cut in September.”
Yesterday, Rose added in a note seen by Fortune: “We continue to believe that the upcoming data will be weak enough to allow the Fed to cut rates by 25 basis points each quarter, but not so bad that they will want to cut more aggressively. However, the risks are asymmetric.”
