Fed Rate Cuts Are Coming, but Investors Disagree on the Path Forward

Fed Rate Cuts Are Coming, but Investors Disagree on the Path Forward By Nihad Ahmed

Markets might be running ahead of themselves by pricing aggressive Federal Reserve interest-rate cuts this year, write Emese Bartha and Paulo Trevisani .

According to CME Group data, investors are mostly pricing a 25-basis point cut in each of the next two Fed meetings in September and November, followed by a larger trim in December, which some analysts and investment managers say would be too aggressive as they have concerns about a slowdown in economic growth.

The debate has implications for central banks around the world. If the Fed follows the more gradual route and cuts in 25-bp. increments, U.S. interest rates will remain high relative to other countries for longer. That, in turn, would attract investors to dollar-denominated assets, strengthening the U.S. currency.

On the other hand, a more aggressive easing cycle in the U.S. could give more room for other central banks to also trim their own rates without weakening local currencies.

Read more .

Top News BOJ Deputy Governor Reaffirms Readiness for More Rate Hikes

Bank of Japan Deputy Gov. Ryozo Himino has backed the case for further interest-rate hikes if the economy and prices grow as expected, echoing recent comments from the central bank's chief.

Himino's remarks on Wednesday suggest that the BOJ's top officials are on the same page about the bank's future policy path.

"The bank's basic stance on the future conduct of monetary policy is that it will examine the impact of market developments and the July rate hike and that, if it has growing confidence that its outlook for economic activity and prices will be realized, it will adjust the degree of monetary accommodation," Himino said in a speech to business leaders in Yamanashi prefecture, located west of Tokyo. Read more .

Hannon's Take: Europe Signals Caution as Fed Plots Rate Cut By Paul Hannon

Europe's leading central banks don't appear to be embracing a likely rate cut by the Federal Reserve in September as an opportunity to speed up the pace of their own easing cycles.

To recap: In a break with recent tradition, Europe's central banks began to cut their key interest rates before the Fed embarked on its own easing cycle. But to some economists and investors, this appeared to limit the speed at which they could cut, since a widening difference in interest rates between Europe and the U.S. would lead to a weakening of European currencies and a fresh source of inflationary pressures. Read more .

U.S. Economy The American Dream Feels Out of Reach for Most

Americans overwhelmingly desire all the traditional trappings of the American dream-owning a home, having a family, and looking forward to a comfortable retirement. But very few believe they can easily achieve it .

A July Wall Street Journal/NORC poll of 1,502 U.S. adults shows a stark gap between people's wishes and their expectations. The trend was consistent across gender and party lines, but held more true for younger generations, who have been priced out of homeownership and saddled with high interest rates and student debt.

Consumer Confidence Hits Highest Level in Six Months in August

The consumer-confidence index rose to 103.3 this month from a revised 101.9 in July, the Conference Board said Tuesday. That's the highest reading since February. Economists polled by the Wall Street Journal had forecast the index to register 101 in August, up from the initial July reading of 100.3.

Home-Price Growth Dips in June, but Prices Still Reach Record High

Home prices in the 20 biggest U.S. metropolitan areas set another record high in June but showed signs of a prolonged and gradual slowdown . The S&P CoreLogic Case-Shiller 20-city house-price index rose 0.4% in June compared with the previous month. Home prices in the 20 major U.S. metropolitan markets surveyed were up 6.5% in the 12 months ending in June. That's a deceleration following a rise of 6.9% the previous month.

Financial Regulation Credit Scores Without Debt? Fintech Cards Baffle Credit Industry

Fintechs with names like Chime Financial and Credit Sesame are advertising an unusual perk on some of their products: Customers can boost their credit scores without ever borrowing or paying back any money .

Commentary Powell's Jackson Hole Pivot on Rate Cuts Won't be His Last

Federal Reserve Chair Jerome Powell is too dovish for this point in the U.S. economic cycle. After all, successful execution of the Fed's dual mandate basically has been achieved: Inflation is headed on autopilot down to the 2% target (thanks to solid productivity gains) and unemployment remains low. Why tamper with success?

Powell's pivot to dovishness in his speech in Jackson Hole, Wyo., last week assured the financial markets that they were right to expect more easing after the widely anticipated September rate cut. But if the labor market remains resilient or inflation reheats, Powell likely will have to pivot again, write Yardeni Research's Ed Yardeni and Eric Wallerstein .

At Jackson Hole, Powell didn't hedge. He didn't push back against market expectations for several rate cuts ahead. He wasn't more dovish than the market, but he didn't utter any hawkish views whatsoever to alter the market's dovish expectations.

Indeed, the federal-funds rate futures market shows cuts totaling 100 basis points, or 1%, to 4.25% by the end of this year. The federal-funds rate is expected to be 3% by the end of 2025.

Powell unambiguously declared that the Fed is now on course to lower interest rates. "The time has come for policy to adjust," he said. "The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks." So the only ambiguities about coming rate cuts are how many and how much. For a Fed chair, that pledge is about as dovish as it could be. Read more .

Ed Yardeni is president of Yardeni Research, a provider of global investment strategy and asset-allocation analyses and recommendations. Eric Wallerstein is chief markets strategist at the firm.

Forward Guidance Wednesday

7:00 a.m.: MBA Weekly Mortgage Applications Survey

10:00 a.m.: Metropolitan Area employment and unemployment; U.S. Securities and Exchange Commission open meeting

6:00 p.m.: FRB Atlanta President Raphael Bostic participates in Stanford Club of Georgia event

Thursday

8:30 a.m.: U.S. preliminary corporate profits; U.S. 2nd estimate GDP; U.S. advance economic indicators report; U.S. unemployment insurance weekly claims report - initial claims

10:00 a.m.: U.S. pending home sales index

2:00 p.m.: U.S. Securities and Exchange Commission closed meeting

3:30 p.m.: FRB Atlanta President Raphael Bostic speaks at Georgia Tech's Scheller College of Business

4:30 p.m.: U.S. federal discount window borrowings; U.S. foreign central bank holdings

Basis Points Asia's fastest-growing economies are hiding a dirty secret: Their youngest workers are battling stubbornly high rates of unemployment . Across these populous nations, that adds up to 30 million people between the ages of 15 and 24 who are looking for jobs but can't find suitable ones. They account for just less than half the global total of 65 million jobless youth in that age range, according to ILO data. Australian inflation pressures eased in July supported by government rebates aimed at offsetting soaring electricity costs and rising rents. The monthly consumer-price index, which is only a partial reading of economy-wide inflation, rose 3.5% in the 12 months to July 2024 , down from 3.8% in June, the Australian Bureau of Statistics said. French households are more optimistic than they have been for two and a half years, suggesting real income rises are being felt as inflation eases, offsetting the drag from the country's political deadlock. A measure of confidence published by France's statistics agency Insee rose to 92 in August from 91 in July. It takes sentiment to its brightest since the conflict in Ukraine escalated in February 2022, a shock that triggered an energy crisis and sent the cost of living soaring across Europe. About Us

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This article is a text version of a Wall Street Journal newsletter published earlier today.

(END) Dow Jones Newswires

August 28, 2024 07:16 ET (11:16 GMT)

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