The Fed's rate cut dilemma: Too early in July, too late in September?
Some views believe that the consideration of the Federal Reserve waiting until September to cut interest rates is procedural rather than economic. Some market participants are concerned that if the Federal Reserve delays rate cuts for too long, the US economy may face the risk of a recession
The unexpected weakness in the US CPI data for June has strengthened the market's expectations of a rate cut, increasing the bet that the Federal Reserve will cut rates in September.
Data shows that the year-on-year growth rate of core CPI in June dropped to 3.3%, the lowest growth rate in over three years. The trend of inflation steadily declining indicates that rate cuts must be put on the agenda as soon as possible.
In fact, before the September 18th meeting, the Federal Reserve also has a rate decision meeting on July 31st. According to Fedwatch, the market's bet on a rate cut in July is only 6.7%.
Since the reasons for a rate cut are so compelling, why wait until September?
Some believe that the Fed's decision to wait until September for a rate cut is more procedural than economic.
With less than three weeks until the end of July, the Fed has almost no time to systematically prepare for a rate cut. However, if the Fed waits until September for a rate cut, the US economy may face more downside risks.
Some market analysts are concerned that if the Fed delays the rate cut too long, the US economy may face the risk of a recession. The lackluster response of the overnight US stock market to the CPI data is evidence of this.
Fed Chairman Powell also stated in this week's congressional hearing that the labor market is cooling, which weakens the upward momentum of inflation and brings uncertainty to the economic outlook.
There are signs that the high-interest rate environment is continuously suppressing consumer spending's driving force on the economy.
According to previous reports, US consumer companies have been warning that the purchasing power of American consumers is nearing its limit. Consumer giant PepsiCo even attributed weak sales to long-term inflation accumulation and high borrowing costs.
Therefore, it is speculated that from now until September, the Fed may frequently adopt a dovish stance, which is positive for the bond market