Breitbart Business Digest: The Market Goes Manic for Rate Cuts

The Market Is Outrunning the Fed

A high school track coach once said that the secret to winning a sprint was to find the fastest kid on the track and try to get ahead of him.

That seems to be the strategy of investors looking at the Federal Reserve: get ahead and stay ahead.

The federal funds futures market is pricing in a cut in each of the remaining three meetings of the Federal Open Market Committee (FOMC) this year. Some investors think the Fed will begin with a bang, cutting 50 basis points in September, while others see a quarter point cut at each of the September and November meetings followed by a 50 basis point cut in December. Regardless, the market is pricing in 100 basis points—a full percentage point—of cuts by the end of the year.

By the end of next year, the market thinks the Fed funds rate will be down to around three percent, 225 basis points lower than today. That would entail the Fed to announce another five quarter-point cuts next year, a pace of more than one every other meeting.

It’s hard to see what could justify that pace of cutting, especially because bond and equities markets are not pricing in anything like a serious downturn. The Dow Jones Industrial Average and the S&P 500 are at or near all time highs. Spreads between safer and riskier bonds do not show any evidence that investors think defaults or corporate bankruptcies are a serious threat.

The Conference Board’s read of consumer confidence is indicating that the odds of a recession are actually retreating. After the Expectations Index for July revised up to 81.1, August marked the second consecutive month of the index above 80. That’s the threshold below which typically indicates a recession is looming in the future.

Powell Says He Doesn’t See a Sharp Downturn Coming

At Jackson Hole, Fed Chair Jerome Powell signaled that the Fed is ready to make its first move in September, but he was equally careful to avoid endorsing any notion of a sharp downturn in the labor market. To the contrary, he emphasized that the Fed did not expect and would not welcome a further softening of the labor market.

What’s more, no one knows what the fiscal policy of the United States government will be next year and in the years after that. The policy mix will no doubt affect the appropriateness of further rate reductions. And that mix will likely depend not only on who wins the White House but also on whether the occupant of the Oval Office has cooperative majorities in the House and Senate. Even a divided government might not result in much fiscal constraint if both parties decide to spend their way into the favor of voters for the midterm elections.

There is, however, some justification for the market to decide that racing ahead of the Fed makes sense. Earlier this year, the Fed retreated from its plans to cut interest rates several times in 2024, with the Fed’s median projection declining to just one cut this year. Now it is almost certainly higher than that, with officials like Atlanta Fed President Raphael Bostic admitting that he’s gone from expecting one cut to two. If the Fed underestimated the pace of cuts a few months ago, who can blame the market for thinking it might still be doing so?