How big will the Federal Reserve’s rate cut be?
That’s the question on investors’ minds as we count down to the interest rate decision tomorrow.
Fed chair Jerome Powell confirmed a rate cut at the meeting last month in Jackson Hole, Wyoming.
But markets are split between a 0.25% and 0.5% cut.
And as soon as we learn that, the focus will shift to Powell’s commentary about potential rate cuts after this one.
That will ultimately let the markets know the Fed’s take on the economy.
And that’s what will drive the markets until the end of the year.
So today, let’s look at the possible impacts of the upcoming rate cut(s)…
Too Late
One of the Fed’s greatest fears is waiting too long to start cutting rates. Waiting too long could send the economy off-kilter… and lead to a recession.
But it takes at least six months for rate cut changes to ripple through the economy. So we won’t know the answer to that until well into next year.
That’s when we’ll see whether the Fed has pulled off the much-touted “soft landing.”
The reticence to cut rates until now shows how nervous they’ve been about inflation…
Inflation has steadily dropped from its 9.1% peak in June 2022. Yet the consumer price index (CPI) flatlined from mid-2023 until March this year.
Since March, though, CPI has finally fallen, as you can see below (red line):
U.S. Inflation Rate
Source: U.S. Bureau of Labor Statistics, TradingEconomics.com
The latest drop from 2.9% to 2.5% has now given the Fed enough room to move. Tomorrow’s cut will be the first since March 2020.
So the market will zero in on the Fed’s commentary because it could provide a glimpse of the economy.
And, in particular, jobs…
If the Fed hints at multiple or bigger cuts to follow, it likely believes the jobs market is slowing faster than anticipated.
|
Free Trading Resources Have you checked out Larry’s free trading resources on his website? It contains a full trading glossary to help kickstart your trading career – at zero cost to you. Just click here to check it out. |
A Recession to Come?
The market is still trying to decide whether the soft jobs market this year is normal or a sign of a recession to come.
The unemployment rate has been climbing since the start of the year (orange line):
U.S. Unemployment Rate
Source: U.S. Bureau of Labor Statistics, TradingEconomics.com
Yet the small 0.1% pullback in August’s data might tip the odds in favor of a 0.25% cut tomorrow.
Hints of bigger cuts after that could mean the Fed thinks unemployment will keep rising.
All this will have an impact – one way or another – on the stock market.
Stocks have seen some sharp falls this year. Despite that, investors have bid up stocks due to anticipated rate cuts.
Big Tech stocks have been the clearest beneficiaries of investors’ enthusiasm. This piece of the market has driven much of the rally since October last year.
In fact, a growing body of investors believe that Big Tech is more immune to a slowing economy than a typical industrial stock.
Now, tech stocks might be resilient in a choppy market.
But if the economy takes a major leg down and unemployment continues to rise, they won’t be left untouched.
And tech has monster weightings in major indexes. It could have a negative impact across the broader market if they roll over and lead the way down.
All things considered, stay careful with your trading… I’ll watch the outcome of this week’s developments closely.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict