Leading into this week’s inflation reports, the question was not whether the door would be open for rate cuts, but whether the Fed would choose to step in or rush out. After the consumer and producer price data, the issue appears to have cleared up at least a little: Markets now expect a better chance of a quarter-percentage point cut in September, but are still entertaining something more hawkish. Commentary after the second of the two releases, the consumer price index, showed the Fed is still weighing variables, but is more likely to be inclined to start slowly. “While there is still plenty of time to prove otherwise, we do not believe today’s data represents an urgent need for a 50 basis point cut in September,” said Lauren Goodwin, chief market strategist at New York Life Investments. “Economic momentum is slowing, but signs that we’re already in a recession – such as a significant increase in jobless claims or a worsening corporate outlook – are not flashing red yet.” Taking the more cautious and less urgent approach, investors in the Fed Funds futures market gave about a 56% chance the Fed would pick the quarter, or 25 basis points, at the open market at the September 17-18 committee meeting, according to the CME Group calculations. Stock markets didn’t think much of the other side either. After Tuesday’s sharp rally in a producer price index that rose just 0.1% in July, the main averages were slightly higher after the CPI showed a 0.2% monthly rise and an annual pace of 2.9%, the slowest since spring 2021. On the market side of the bond, longer-term yields were mostly lower, but the policy-sensitive 2-year note moved little. US2Y .SPX 5D Line Yields and Stocks Overall, a market looking for the Fed to come off the hook and start easing soon was still taking it all in. signal darker things, said Liz Ann Sonders, chief investment strategist at Charles Schwab. “A more significant deterioration in the labor market than we’ve seen could prompt a more aggressive stance,” Saunders said. “Be careful what you wish for to hope that the Fed will move more aggressively. History shows that a fast cut cycle as opposed to a slow cut cycle is not what rewards stocks.” Current futures pricing suggests that the September cut will be followed by a 50 basis point move in November and another 25 basis point cut in December. However, Fed Funds futures pricing has been even more volatile than usual this year, and the market now appears more concerned that the Fed is acknowledging a potentially deteriorating labor market. “I worry that the Fed is essentially waging the last war,” said Tani Fukui, macro economist at MetLife Investment Management. “The last war on inflation was in 1980, when inflation was around 15%. With core personal consumer spending moving towards 2%, “This is a completely different world and I think we’re overthinking it.” Fukui noted the rising unemployment rate and its potential to trigger recessionary indicators, although he does not believe the economy is yet in a real contraction. “It’s not something I would play with in the interest of perfection on the inflation side,” he said. “A one-time aggressive cut of 50 basis points would go some way to alleviating some of that pressure.”
