After two years and seven months of rising or staying flat, the market expects the Federal Reserve’s federal funds interest rates to finally move lower this month. This has been the market’s strong expectation since August. The question now is how big of a rate cut will the Fed announce on September 18?
The jobs report on Friday revealed 142,000 new jobs were created last month, fewer than expected. It reinforced the view that the labor market is slowing. It also failed to resolve the question of how big the Fed rate cut might be: 25 basis-points (0.25%) or 50 basis-points (0.50%)? The mainstream expectation is a 25-basis-point rate cut. That is the increment the Fed seems to prefer in recent history. However, the likelihood is growing of a 50-basis-point drop.
This Wednesday’s CPI inflation report for August may end up being the deciding factor as to whether the Fed will deliver a bigger-than-usual, 50-basis-point rate cut next Wednesday. The U.S. central bank hasn’t lowered borrowing costs by that much at one time since late 2008, when the U.S. was in the midst of the worst financial crisis since the Great Depression.
Friday was the last day Fed officials could speak publicly before a quiet period leading up to their next meeting next week. On Friday, they seemed to leave their options open. Fed officials who spoke after the release of the jobs report didn’t explicitly state a preference for the size of the first reduction. They implied that the economy wasn’t faltering in a manner that would demand a larger half-point reduction this month, but they didn’t explicitly rule out a bigger cut, either.
We will stay tuned into these developments and what they might imply for us as long-term investors. Let us know if you need anything in the meantime. Have a good week!