Key Points
- Previously released US inflation data has been softer than usual, boosting expectations for a September rate cut.
- The FED’s Raphael Bostic and Thomas Barkin are also set to speak, and traders are pricing in a 94% chance of a 25 bps cut.
- The markets are eyeing upcoming Fed speeches for clues on policy direction.
The FED is under pressure to cut its interest rates. This comes especially as the softer U.S. inflation data has been a significant source of optimism. For example, the July Consumer Price Index rose just 0.2% month-over-month and 2.7% year-over-year.
This was below expectations. Traders reacted quickly and have increased the probability of a 25 basis point cut in September to 94%. It is up from 85% before the report.
Market Reaction to FED Rate Cut Speculation
Some analysts believe a 50 basis point cut is possible if labour market data shows further weakness. The following jobs report could be the deciding factor for the cut size.
The weaker inflation data also pulled the U.S. Dollar Index below 98.00. This marked a reversal from its recent gains. In particular, U.S. equities surged on Tuesday as investors priced in the likelihood of rate cuts.
The S&P 500 gained 1.14%, the Dow Jones rose 1.16% and the Nasdaq 100 climbed 1.38% to new highs. Wall Street’s rally was powered by the belief that lower borrowing costs could extend corporate earnings growth and support valuations.
Asia saw its major indices follow suit, with the Japan 225 hitting a new high above 43,000 points. On the other hand, Hong Kong’s benchmark gained 1.3%. Chinese markets also posted solid advances, supported by strong corporate earnings.
FED Speeches in Focus
The attention is now on comments from Fed officials scheduled for later today. According to reports, Austan Goolsbee, a voting member of the FOMC, will speak at 17:00 GMT.
His remarks could give investors insights into how strongly the committee is leaning toward easing policy. Raphael Bostic and Thomas Barkin are also set to speak. However, the effects of their comments may be limited since they are not current voters.
Investors will listen for any signals confirming (or challenging) the market’s expectations of an aggressive rate cut. The real test, however, will come later this month when FED Chair Jerome Powell speaks at the Jackson Hole Symposium.
Rate Cuts and Their Effects
A rate cut by the FED could lower borrowing costs for households and businesses. Mortgage rates, credit card APRs, and business loans will likely decline if the central bank reduces its benchmark rate.
Lower rates can weaken the dollar and make U.S. exports more competitive abroad. However, they may push up prices of commodities like oil and gold, which are priced in dollars.
The rest of the world is also likely to feel the effects. For example, emerging markets could benefit from capital inflows as investors seek higher yields outside the U.S. If rate cuts happen too quickly, they could fuel asset bubbles if liquidity grows uncontrollably.
Commodities and Crypto Join the Rally
Commodity prices have been showing mixed signals so far. For instance, WTI crude slipped toward $63 per barrel while gold fell to near $3,330 per ounce. Silver stabilised around $37.50 after dropping earlier in the week.
Cryptocurrencies reacted too, with ETH rising 8.67% and trading near its all-time high as institutional adoption grows. Bitcoin has increased by around 1.19%. At the same time, altcoins like Solana, Cardano, and Dogecoin are also green.
Some corporate moves further boosted sentiment. Bitmine Immersion recently disclosed extensive Ether holdings. At the same time, 180 Life Sciences was rebranded as “ETHZilla” after receiving an investment from Peter Thiel.
What to Watch Next?
The focus now is on FED commentary today and tomorrow’s U.S. Producer Price Index data. Both will help analysts to come up with sharper expectations for September.
Beyond that, the Nonfarm Payrolls report in early September is another risky event to be aware of. For context, any surprise strength in job growth could challenge the near-certainty of a cut. However, the market generally sees easing as inevitable.
Investors will be looking out for political developments over the next month. This is because Comments from the White House about suing FED Chair Powell have created buzz over the central bank’s independence.
