On Tuesday and Wednesday, the Federal Reserve will meet to set its monetary policy. The FedWatch tool predicted an over 90% chance of a 25-bps cut. Although markets widely anticipate a rate cut, why should markets watch the Fed so closely this week?
The Fed will need to assess the impact of tariffs on jobs and inflation. The producer price index fell while the consumer price index increased. Producers cut costs to absorb tariff-related costs. Corporations likely cut jobs and delayed hiring to offset those costs.
The Fed will need to justify how a small rate cut will strengthen an already weakening job market. Suppliers will not likely benefit from small borrowing rates when tariffs are added proportionately more to costs. Furthermore, when companies cut jobs, the pool of paid workers falls. That hurts demand for goods and services.
Stock markets are bullish on more than one rate cut this year. Bank stocks like Goldman Sachs (GS) and JPMorgan Chase (JPM) rose by 5.7% and 4.3%, respectively. The TLT stock, or iShares 20+ Year Treasury Bond ETF, gained 1.57%. Expect treasury yields to continue to fall. Debt markets are pricing a further loosening of monetary policy.
Your Takeaway
Stock markets priced in this week’s rate cut. They also expect more. Investors should not count on Fed Chair Powell to hint at more rate cuts later this year.
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