In just a few days, markets have dismissed the urgency for the Fed to cut interest rates. Earlier this week, there were even calls for an emergency rate cut. At least, the market believes that the Fed will almost certainly lower the benchmark interest rate by at least half a percentage point. Now? Markets are pricing in a coin flip between the odds of a rate cut of a quarter or a half percentage point as confidence grows that the economy will not slip into recession and that the Fed is not significantly behind the economic curve. “I do still expect the slowdown to prompt the Fed to ease monetary policy, but the market reaction is suspicion that we have suddenly flipped the switch and the economy is already in contraction,” said Chief Economist Steven Wieting. and Citi Wealth Strategist. While he expects the labor market to slow further, Vitin said economic growth has been underpinned by fiscal stimulus and consumers are still in relatively good shape and “barring a new shock, we won’t see a recession.” A brief panic began on August 1 and lasted until early this week due to an unexpected increase in layoffs and weak ISM manufacturing data. But a report from the Labor Department on Thursday showed a decline in initial jobless claims, and another ISM report this week pointed to stronger-than-expected growth in the services sector. As a result, markets were pricing in an 85% chance of a 50 basis point rate cut in September on Monday, rising to 54% by Friday, according to CME Group FedWatch’s measure of the 30-day federal funds futures contract. Markets are pricing in about a 68% chance of inflation falling a full percentage point by the end of 2024, but even that would be down from the 1.25 percentage point drop that was all but certain on Monday. Wharton professor Jeremy Siegel, one of the loudest voices supporting aggressive action by the Fed, called for an emergency rate cut on Monday. But even he has softened his tone and is now simply encouraging Chairman Jerome Powell and his colleagues to ease policy as soon as possible, although action is no longer required during the meeting. “There’s no way he can do that or things are going to fall apart. I don’t think things are going to fall apart,” Siegel, chief economist at WisdomTree, said in an interview Thursday. “As long as it can get below 4%, that’s even better. OK.” For more than a year, the Federal Reserve has maintained its benchmark interest rate in a range of 5.25%-5.50%. Powell and several other central bank officials have said in recent days that they are open to cutting interest rates but have provided no details on timing or magnitude.
Markets no longer believe the Fed needs to cut rates so aggressively | Real Time Headlines
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