The long awaited Fed rate cut It’s here: The US central bank will announce its monetary policy decisions on Wednesday evening and it’s practically discounted a reduction in interest rates. A sign that many were waiting for for some time and which would mean the end of the emergency phase linked to inflation and the start of another phase of the economic cycle, characterised by low growth.
But what to expect from this meeting? And what will be the reaction of the markets? The opinion of analysts is not unanimous and depends on the more or less pessimistic reading of the most recent macroeconomic data.
The expectations
THE consensus collected by Bloomberg in a pool of 46 economists predicts a rate cut 25 basis pointswhich would give a timid signal that things are changing. Yet, the crowd grows of those who expect a more decisive cut 50 basis pointsbased on a more pessimistic reading of the macroeconomic data released in the last period, which seem to herald a recessionary phase.
Currently, the Fed Funds benchmark rate is in a fluctuation band of the 5.25-5.50%. The market appears to be trending higher: Fed Watch futures at the CME are giving a 59% chance of a 50 point cut from 30% a week ago, while only 41% are in favor of a reduction of 25 points, down from 70% a week ago.
In any case, the economists agree in believing that, in the three meetings that separate us from 2025, the reduction will reach 75 basis points: a sequence of three 25-point cuts or one more aggressive cut and one softer one. The market instead he discounts a even more aggressive reductionat least equal to 100 basis pointsif not more: the probability that the rate will fall to 4.25-4.50% in December is 29.5% and that it will even fall to 4-4.25% is 43.6%.+
Macro data observed by the Fed
To make its decisions, the FOMC will look at the data arrived in the last period. Inflation It now seems completely tamed, having dropped to 2.5% on an annual basis, in line with expectationsfrom 2.9% in July. The core rate, which excludes the most volatile components such as food and energy, is stable at 3.2% and in line with the consensus.
The index too PCE Price Indexreleased at the end of August, had confirmed consumer price inflation at 2.6%lower than analysts’ expectations (2.7%).
While the market of the vote has given clear signals of slow down: the latest report for the month of August showed the growth of 142 thousand jobswell below the 164 thousand expected by the market. Numbers that seem to speak of recession for the third quarter, despite the upward revision of the GDP of the second quarter to 3%.
The move by the ECB and other central banks
There ECBin the meantime, has already cut interest rates twicethe second time quite decisively, because it reduced the deposit rate by 25 points and the refinancing rate by a good 60 points at 3.65%, changing the operating strategy. A move that confirmed the difficulties faced by the European economy, which is clearly slowing down, while inflation has almost returned to line with the target.
If the ECB acted first, in this late summer round, the Bank of England and the Bank of Japan they could wait a little longer a bit to check the conditions of the economy and to regulate the moves of the Fed. This week, in fact, the monetary policy committees of the British central bank will meet (Thursday), which should confirm rates at 5% barring any last-minute surprises, and the Japanese central bank (Friday), which should confirm rates at 0.25% after having abandoned the policy of negative rates before the summer.
What to expect from the markets
This will be a crucial week for the marketswhich could show caution waiting to understand how the three central banks will move. A certain volatilitysince this week marks the quarterly technical deadlines, or so-calledand “four witches”.
That said, the market that most will benefit from the cut of the rates will beto the bondexpected to rise, while the stock market could react “gut” to a more decisive cut in interest rates by the Fed, focusing on the recession theme or celebrating the more decisive move by the US central bank. This remains to be seen, after the sectors that will do best will be those most sensitive to a rate cut, such as the real estateand, but also ole utilities. One sector that could instead pay the price of a rate cut is that bankingwhich would see profit margins shrink.
