- Markets expect an interest rate cut by the Fed’s September meeting
- Cooling inflation for June shifted analysts’ views on borrowing costs
- Price pressures in June moderated to 3.0% on an annualized basis
Markets Price In Big Chance of Rate Cut in September
Markets broadly are now pricing in the first interest rate cut to arrive by the Federal Reserve’s September meeting. This change in the overall narrative arrived on Thursday, right after the latest inflation report out of the US suggested that price pressures continued to moderate.
In June, the consumer price index showed that inflation skittered down to 3.0%, from a 3.3% growth clip in May, both on an annualized basis. The reading was highly promising and sparked enthusiasm that interest rate cuts were back on the table.
Inflation Keeps Moving Lower, Raising Rate Cut Outlook
Previously, the Federal Reserve had communicated that they needed more good data to get the confidence to slash interest rates. With this fresh inflation print, coming below analysts’ calls for a 3.1% pace in June, markets are excited to see what happens at the US central bank’s September meeting when Fed officials decide on the level of interest rates.
These rates are set at a 23-year high of 5.25% to 5.50%. Investors, traders, and money managers are now anticipating the September gathering to lower borrowing costs by 25 basis points. And they pin this chance at a 93% certainty.
September is the Final Meeting Before the US Presidential Election
It’s worth noting that the September meeting is the closest meeting to the US Presidential Election. Can this rate-setting event be politicized? Most certainly. If the Federal Reserve moves to lower borrowing costs, markets can interpret this move as political and sway voters toward the Democrats and the current President Joe Biden.
But on the other hand, a wave of votes for former President Donald Trump is not excluded even if the Fed lowers rates. Trump has previously noted he’s in favor of seeing the economy grow and has vowed to support businesses and consumers with easy monetary conditions.
Rate Cut Stimulate Economic Spending
Such an easy monetary condition is the expected slashing of interest rates. When they move lower, money becomes more accessible because borrowing is cheaper. In other words, consumers and businesses pay less to get loans injected into the economy through various ways of spending.
And vice versa—higher rates discourage taking out loans because paying them off is more expensive. This monetary policy measure is taken when the economy is overheating, and too much money flows into the system. The downside is that these conditions can derail the economy and risk a crisis or the so-called hard landing.
Is Soft Landing Possible?
For now, markets are hoping for the so-called soft landing, in which inflation is brought to a cool state of nearly 2% and interest rates are low enough to allow businesses and consumers to take out loans and keep the economy growing and moving forward.
The recent inflation report adds to a string of positive economic releases, boosting the chances of a soft landing and raising the probability of more spending, which could keep the economy chugging along on its upside trajectory.
