As investors eagerly awaited the latest inflation data, the expectation of a small interest rate cut by the Federal Reserve at its September meeting began to take shape. The aftermath of a report indicating that the Fed will not be opting for a 50 basis point cut led to a market sell-off, with the S&P 500 and Dow Jones Industrial both experiencing more than a 1.5% dip in a two-hour window.
Eric Wallerstein, chief markets strategist at Yardeni Research, emphasized that a 25 basis point cut would be a more favorable move by the Federal Reserve, especially considering the potential volatility that a larger cut could bring to short-term funding markets.
While recent economic indicators such as the jobs report and Consumer Price Index (CPI) showed signs of an economic slowdown, the details within the reports painted a more nuanced picture. The core CPI, which excludes food and gas prices, exceeded Wall Street’s expectations with a 0.3% increase in August.
As expectations for interest rate cuts from the Fed continue to evolve, clues about the central bank’s future moves will be revealed on Sep. 18 when the Federal Reserve releases its Summary of Economic Projections, including the “dot plot” detailing policymakers’ expectations for future interest rates.
Market expectations currently anticipate a total of 100 basis points of cuts from the Federal Reserve this year. Should the actual number of cuts fall short of these expectations, it may not necessarily spell bad news for stocks, according to Wallerstein. Stronger-than-expected economic growth and consumer spending could mean more room for stocks to flourish as earnings continue to grow.
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