Skip to main content

Is the Federal Reserve Caught Between a Rock and a Hard Place?

Video section is only available for
PREMIUM MEMBERS

As of 4:04 PM EDT the countdown to the FOMC meeting is four days, 21 hours, 56 minutes and 24 seconds away, this according to the countdown clock on the CME’s FedWatch tool. This tool is also predicting that there is an 80.6% probability that the Fed will announce and implement ¼% rate cut, and a 19.4% probability that they will cut their Interbank Fed funds rates by ½%.

In other words, they are predicting that there is a 100% probability that the Fed will announce a rate cut. Therefore, the most important questions that need clarification is first; how deep will the cut be, and second; will they clarify how many rate cuts they intend to implement throughout the remainder of the year.

According to Bloomberg “Given the latest data on the U.S. economy, the Federal Reserve may well be tempted to adopt a less dovish posture on interest rates. But with markets already counting on a 25 basis-point rate cut next week, the Fed’s challenge will be to make clear exactly how it’s thinking about the outlook for the next year.”

The data they are referring to is today’s GDP report which is indicating that the economy is on an upward trend with estimated second-quarter growth at 2.1% at a seasonally adjusted annual rate. This is above the estimated second-quarter growth in GDP at 1.8%.

This data along with this week’s strong growth in U.S. equity indexes taking the S&P 500 and the NASDAQ composite to new record highs is much stronger than the data used for the initial assessments and statements by Jerome Powell earlier this month.

The Federal Reserve will be placed in a delicate situation if they adopt a less dovish stance than the market has currently factored in. As Conor Sen wrote in his recent Bloomberg opinion article “…the Fed has two difficult tasks next week: determining policy, and communicating that without disrupting markets. The outlook has shifted since June, when global economic data and sentiment among U.S. business leaders were moving in the direction of more rate cuts. Yet fixed income traders appear to be ignoring the change. Should the Fed feel the need to let down those hoping for multiple rate cuts, it will need to tread lightly.”

Regardless of the final decision announced by the Federal Reserve next week, there is one certainty; until the Fed announcement next week there is uncertainty as to what the final outcome will be. That being said market participants are already plotting their strategies for any potential outcome that is disclosed on July 31st.

Wishing you as always, good trading,

Gary S. Wagner - Executive Producer