Yesterday the ECB cut rates, how big will next week's Fed cuts be? Some people seem to think more than expected…
Europe’s central bank cut rates yesterday by quarter of a percent, with many pundits now saying that the bank will now pause in October to assess the recent patch of sluggish growth in the Eurozone. And while a majority of economists, polled by Reuters in the UK, think that the Bank of England will hold rates next Thursday, across the pond it may be that there is a substantial interest rate cut coming.
The U.S. dollar dropped to its lowest level this year against the yen on Friday, as gold prices soared to a record high, fuelled by shifting expectations around next week’s Federal Reserve interest rate decision. Markets were shaken overnight after articles in major financial publications, including the Financial Times and Wall Street Journal, suggested that the Fed could potentially make a larger-than-anticipated half-point rate cut, leading investors to reassess the likelihood of such a move. Such a move is also likely to have a big effect on US consumers’ optimism – which in turn may have an effect on THAT election.
Currently, traders estimate a 41% chance of a half-point cut, a dramatic increase from the 14% odds seen earlier. Former New York Fed President Bill Dudley, speaking at a forum in Singapore, expressed support for the larger cut, stating, “there’s a strong case for 50.” This sentiment was echoed by market strategist Fiona Cincotta, who noted, “It feels like a coin toss now, that is what the market showing.”
The dollar weakened by nearly 1% to 140.41 yen, marking its lowest point since December 2023. Simultaneously, gold surged to a new high of $2,570 per ounce, driven by the weakening dollar and bolstered by investor uncertainty around the Fed’s decision.
Wall Street responded positively, with U.S. stock futures and major indexes rising as traders anticipated a rate cut. Benchmark Treasury yields also fell, with the 10-year yield dropping to 3.64%. Rate-sensitive two-year Treasury yields decreased further to 3.59%.
The ongoing debate within the Federal Reserve about the size of the rate cut reflects broader concerns about the economy. Officials face a pivotal decision on how quickly to ease monetary policy, especially in light of moderating inflation and a resilient labour market. A half-point cut, if enacted, would mark the Fed’s first rate reduction in over four years and could signal a quicker return to more neutral interest rates.
Former Fed Vice Chair Donald Kohn noted that the central bank could move swiftly to adjust policy should they feel they acted too slowly. Fed Chair Jay Powell has indicated that the central bank is committed to supporting the labour market as inflation continues to moderate. However, mixed data, such as rising wages and slowing job growth, complicates the decision. Some officials, like Fed Governor Christopher Waller, have expressed openness to a larger cut but emphasise that any decision should be carefully considered.
The outcome of the Fed’s meeting could significantly impact financial markets. A more aggressive rate cut could signal concerns about the economic outlook and prompt markets to price in deeper reductions. Former Fed Vice Chair Richard Clarida cautioned that while a half-point cut might be beneficial, it could also raise alarm, asking, “What do they know that we don’t know?”
The broader global market also saw positive movement, with European shares rising and the STOXX 600 index heading for its strongest weekly gain in a month. Oil prices also climbed, bolstered by supply concerns following Hurricane Francine’s impact on Gulf of Mexico production.
As the Federal Reserve approaches its crucial decision next week, investors will be closely watching for any signals that might indicate how sharply rates will be cut and what that could mean for the economy moving forward.
