How much will the Federal Reserve lower interest rates on Wednesday? This is perhaps the most forecasted reduction in history with the initial cut expected/forecasted over 20 months ago.
Friday’s comments suggested that inflation data is no longer significant given the Fed’s statements that it is now all about jobs and last week’s muted reaction to higher-than-expected monthly inflation statistics.
Friday import/export price statistics was released and Treasuries rallied significantly. The odds of a 50-bps reduction rose from 0% to over 40%. Wow! Talk about volatility.
Bloomberg writes however that of economists surveyed, 46 see policy makers opting for a more gradual pace of rate reduction, forecasting three quarter point cuts this year. The market is suggesting almost five. “Just a few” of the economists surveyed expect a faster pace of reduction according to Bloomberg.
The economists surveyed are projecting a 3.5% to 3.75% rate by year end 2025 and 2.75 to 3% by the end of 2026.
The odds are significantly high the bond market will be disappointed in Wednesday’s outcome given its recent decline in yields, thus suggesting a very dovish Fed. Equites also have advanced predicated upon a dovish Fed.
As discussed last Monday, the S & P and NASDAQ had just experienced their worst week since March 2023 and 2022, respectively. Averages rebounded last week on monetary policy expectations.
Are these gains sustainable?
The economic calendar is comprised of retail sales, industrial production/capacity utilization, various housing statistics and the Index of Leading Economic Indicators.
Last night the foreign markets were down. London was down 0.02%, Paris down 0.01% and Frankfurt down 0.26%. China was down 0.48%, Japan down 0.68% and Hang Seng up 0.31%.
Futures are bifurcated as Dow futures are up 0.30% and NASDAQ down 0.30%. The 10-year is up 2/32 to yield 3.64%.
