It was all but a foregone conclusion that the U.S. Federal Reserve would cut its benchmark interest rate for the second time in three months after this week’s Federal Open Market Committee meeting.
“You could make a very cogent argument that ‘we’re kind of done now. Most of the time a lot of the drama is taken out of this. But I think there might be quite a lot of drama in that press conference.”
Not so fast.
Surging energy prices on Monday helped fuel sentiment in the other direction and while the Fed is still likely to cut rates, there’s a lot of movement in the other direction now. Traders in the Fed funds futures market on Monday priced in a 34% chance that the Fed would not cut rates and will likely stay put — the probability of that happening a month ago was zero, and just a 5.4% chance a week ago, according to the CME.
So after changes in the economic trends and inflation pressures following a sudden spike in oil prices due to the attack in Saudi Arabia, the Fed is much more likely to tighten monetary policy, or at least stand pat, than to cut rates.
“While the push-through of inflation from oil prices to core prices is small, the jump in overall prices, in combination with signs that core inflation is already heating up, may make it more difficult for the Fed to cut rates further,” S&P Global Ratings economist Beth Ann Bovino told CNBC. “They had a cushion to fall back on with lower inflation — they could cut rates given inflation was low. Has the cushion been removed?”
Strong, recent reports in consumer and business confidence and retail sales has pushed some more to the dovish side as far as a rate cut, as well as a deescalation in the U.S.-China trade war.
“I can’t think of another time recently that the Fed had this much of an about-face within a month or a few weeks of their meeting date,” Leuthold Group CIO said Jim Paulsen said. “I still think they do 25 (basis points), but the case is weak.”
Since June, economic data in a number of areas has gotten stronger, raising the possibility we might get a rate cut that was mostly a foregone conclusion even a week ago.
“You could make a very cogent argument that ‘we’re kind of done now,’” Paulsen said. “Most of the time a lot of the drama is taken out of this. But I think there might be quite a lot of drama in that press conference.”