Fed Poised for 25 Basis Points Rate Cut Amid Mixed Economic Signals as Market Awaits Key Inflation Data
1min read The Federal Reserve is widely anticipated to cut interest rates by 25 basis points at next week's policy meeting, although market expectations for further reductions within the year remain mixed. Recent economic data, particularly the lower-than-expected overall CPI but unexpectedly higher core CPI, have moderated the outlook for aggressive monetary easing.
In response to these inflation figures, traders are now predicting a more modest rate cut of 25 basis points. This perspective was reinforced by weaker-than-anticipated non-farm payroll figures for August, which showed an increase of 142,000 jobs, below the economist forecast of 160,000. Although the unemployment rate fell to 4.2%, the slowdown in job growth has tempered expectations for a robust monetary easing.
Market consensus increasingly leans towards a 25 basis points cut next week, reflecting a cautious approach by the Fed. New York Federal Reserve President John Williams emphasized the need for balance in policy decisions, pointing towards a gently lowering inflation rate towards the Fed's 2% target but refrained from committing to the specifics of future rate cuts. His comments suggest further rate cuts could depend on upcoming economic data.
According to the CME FedWatch Tool, the likelihood of a 25 basis point rate cut this month stands at 71%, while the probability of a 50 basis point cut has fallen to 29% from a previous high of 47% before the employment data release. The data, however, leaves room for interpretation and suggests that the Fed's upcoming decisions will closely hinge on additional economic indicators.
The bond market echoed these sentiments, with the yield on the 10-year U.S. Treasury declining to its lowest in 15 months last Friday, closing at 3.708%. The two-year Treasury yield also fell, ending the session at 3.646%. These movements have provided some support for gold prices, although the future trajectory remains uncertain as investors await more definitive economic insights.
Market participants also turned their attention to the upcoming U.S. August CPI data, projecting an overall inflation rate of 2.6%, with core inflation expected to remain steady at 3.2%. These figures will be critical in shaping expectations for the Fed’s next moves. Analysts suggest that for a 50 basis point cut to materialize, it would require a significant negative inflation surprise.
On the geopolitical front, ongoing conflicts and economic concerns, such as reduced demand from China, continue to weigh on the global economic outlook. These factors, combined with the Fed’s upcoming policy decisions, emphasize the delicate balancing act that the central bank must perform in the months ahead.