During the past six months, there have been many ups and downs that led to investors speculating the time of rate cuts. However, given the Fed Powell speech during the Jackson Hole event last month, the start will likely be this week. If it happens then it will be the first rate cut since March 2020, that rate-cut cycle started in August 2019 exactly five years ago.
The main focus now shifts to how much and how many. Currently, the Fed rate swap market is giving the highest possibility of a 50bps cut with 59% odds which was 14% in the middle of last week. Certain credential-driving reports and articles influenced the change.
The Fed is more likely to focus on the unemployment rate which is stable at 4.2% and the inflation trend that gave a first sign of a pause in the falling trend as core inflation came in higher. This trend does not indicate too high chances of accelerating fall a 25bps cut will be likely even if the bond yields are factoring the same.
The most important questions that investors need to get answers to are, will history repeat itself as an official recession occurs within 3-4 months of the first rate cut? If it is only a 25bps rate cut then will bond yield rise and the stock market correct? Will Israel enter Lebanon and impact oil prices? The answer to these questions will decide the rate cut path and its impact on the financial markets.
Comments