Will the Fed Finally Give Stock Markets the Rate Cuts They Want?
Will the Fed Finally Give Stock Markets the Rate Cuts They Want?
By:Ilya Spivak
Will the Federal Reserve finally give the markets what they are looking for?
- Stocks stalled after CPI data sparked a one-off rally on Fed rate cut speculation.
- Markets and the central bank are still far apart on how much stimulus is coming.
- FOMC meeting minutes, Powell speech at Jackson Hole Symposium are in focus.
Is the Federal Reserve finally ready to make the markets’ rate cut dreams come true? Wrestling with that question will be front and center in the week ahead as the clock ticks down to the US central bank’s next policy meeting in September. The answer is likely to be formative for risk appetite across the asset spectrum, with Wall Street as the pacesetter.
Last week, traders cheered consumer price index (CPI) data that they judged to be giving the Fed a green light to begin the easing cycle. Stock markets then demonstrably stalled. The S&P 500 returned a meagre 0.05% while the tech-tilted Nasdaq 100 fell 0.56% in the three days after the CPI report.
Stock markets and Fed rate cuts: losing faith?
This lack of follow-through may reflect follow-on producer price index (PPI) data warning not to take benign CPI readings at face value as tariff-linked costs begins to pass through from wholesalers to consumers. In fact, sentiment data from the University of Michigan tellingly showed as much, with the mood souring thanks to rising inflation expectations.
More broadly, these numbers might have reminded the markets why they have been pining for Fed stimulus in the first place: global economic growth is slowing, and the US may not be strong enough to save it. Consumption is the biggest driver of US growth. It was already weak in the first half of the year. Rising prices would weaken it further.
For now, the benchmark Fed Funds futures are pricing in 117 basis points in rate cuts between now and the end of 2026. Markets and Fed officials broadly agree on 50bps slated for this year. A wide disparity then opens up for next year: traders have penciled in 70bps, while Fed officials have owned up to just 25bps.
All eyes on FOMC meeting minutes, Jackson Hole Symposium
As for September, the priced-in probability of a rate cut at that meeting remains convincing at 83.2%, through that is down from the 94.3% seen just after the CPI report. October’s meeting looks to be a toss-up, with a second cut narrowly expected to appear in December.
From here, minutes from the July meeting of the Federal Open Market Committee (FOMC) will mark the first key inflection point this week. Fed-watchers will be keen to see loud dissenters from the “wait-and-see” consensus – governors Chris Waller and Michelle Bowman – represent a broader dovish shift in officials’ thinking.
The spotlight then turns to the Fed’s annual Jackson Hole Economic Policy Symposium, kicking off in Wyoming this week. As ever, the main event will be a speech by Fed Chair Jerome Powell. This typically amounts to a stage-setting exercise, where the central bank chief establishes the lens through which to assess policy trends in the year ahead.
Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
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