The Federal Reserve meeting this week comes at a key time. Markets have fully priced in a quarter-point Fed rate cut at the following meeting in September, with expectations of up to three cuts for the full years. That's despite some mixed inflation data recently.
The Fed chief Jerome Powell and fellow policymakers could essentially lock in expectations for a September rate cut on Wednesday, though Powell almost certainly wouldn't be explicit. If policymakers think investors are getting ahead of themselves, they'll likely want push back on Fed rate-cut expectations soon.
Powell on Wednesday could choose to maintain his recent manta: Inflation trends generally improving, but he wants to see more. The Fed chair would have another big chance to signal rate cuts with his annual Jackson Hole speech in late August. Powell would have the July jobs report and consumer price index by that point.
One reason for the Fed to cut rates in September is political. Policymakers likely don't want to make their first rate cut on Nov. 7, two days after the presidential election. If policymakers start cutting rates on Sept. 18, subsequent rate cuts would less meaningful.
If Powell gives the green light to investors on Wednesday, Treasury yields could fall in anticipation of lower rates. However, markets rates have already fallen significantly over the last three months.
Fed Rate Cut Odds
July 30-31 Fed meeting: Markets see just a 4.7% chance of a rate cut on Wednesday, according to CME Group's FedWatch tool.
Sept. 17-18 Fed meeting: Investors see a 100% chance of a cut by this meeting, including a slim 11.3% chance of 50 basis points. On June 28, markets saw only a 64.1% chance of any Fed rate cut.
Nov. 6-7 Fed meeting: Investors see a 67.9% chance of at least 50 basis points in cuts by this point. A month ago, investors still saw a 23.4% chance of no cut at all, with only a 26.4% chance of 50 basis points.
Dec. 17-18 Fed meeting: Markets see a 97.8% chance of at least 50 basis points in cuts. They are pricing in 63.9% chance of 75 basis points in Fed rate cuts. On June 28, investors saw a 61.8% chance of two Fed cuts and 20% of 75 basis points.
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