The probability of a 25-basis-point rate cut has skyrocketed to 74.5%.
This would be the third rate cut of the year.
The federal funds target rate would be lowered to a range of 1.5% to 1.75%.
The Odds of a December Rate Cut Just Got a Whole Lot Longer: What Does it Mean for the US Economy?
Last week, the CME FedWatch Tool, which is widely followed by market analysts and economists, showed that the market has shifted its expectations for a Federal Reserve rate cut this month. As of this writing, the probability of a 25-basis-point cut has skyrocketed to 74.5%, marking a significant increase from its previous reading. This move would be the third rate cut of the year, and it’s got us wondering: what’s driving this surge in expectation, and what does it mean for the US economy?
A Return to Easy Money
In the past few months, the Federal Reserve has been engaged in a series of rate cuts, motivated by concerns over a slowing global economy, escalating trade tensions, and signs of a possible recession. The first rate cut in July was seen as a precautionary measure, aimed at shielding the economy from potential risks. The second cut in September was largely seen as a response to the economic slowdown and the drop in inflation.
Economic Concerns Mount
One key factor is the recent spate of weak economic data. The manufacturing sector has been struggling, with indicators such as the ISM Manufacturing Index and the PMI (Purchasing Managers’ Index) showing signs of contraction. This has led to concerns about a potential recession, particularly among small and medium-sized businesses.
Inflation Concerns
Another factor at play is the Fed’s concerns over inflation. While inflation has remained low, the central bank has been hesitant to dismiss concerns about the risks of deflation. With the global economy still reeling from the effects of the pandemic, there are fears that a prolonged period of low inflation or deflation could lead to a sustained economic slowdown.
A Shift in Market Expectations
The CME FedWatch Tool is not the only market indicator that’s seen a shift in expectations. The fed funds futures market, which is widely followed by traders and investors, has also seen a significant increase in the probability of a rate cut. This is a key indicator of market expectations, as it reflects the collective wisdom of traders and investors who are betting on the direction of interest rates.
What Comes Next?
So, what happens next? If the market expects a rate cut in December, will the Fed deliver? The answer is a resounding maybe. While the Fed is not bound by market expectations, it does take into account the collective wisdom of investors and traders when making its decision.
In recent months, the Fed has been keen to emphasize its commitment to data-dependent monetary policy, meaning that it will respond to changes in the economy rather than being driven by market expectations. This means that the Fed may still cut rates if it believes the economy needs a boost, but it may not necessarily do so just because the market is expecting it.
The US economy is entering a period of significant uncertainty, and the decisions made by the Federal Reserve will have far-reaching consequences for the global economy. As investors, policymakers, and economists, we can only hope that the Fed has a good grasp on the complexities of the economy and will make the right decisions to ensure a sustained period of growth and prosperity.
