Counting Basis Points before They Hatch

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Special Guest Blogger: Tim Kearney

It’s difficult to understand how markets got so over their skis on monetary policy expectations. As recently as July 3, markets had fully priced in at least a 25-basis-point (bp) cut of the fed funds rate in July, and expectations were moving towards a 50 bp cut. The logic was a combination of an economy which was slowing — though still above trend — and inflation that was a bit below the Federal Reserve’s 2% target. Then those expectations crashed into the hard place of a 224,000 monthly job report accompanied by modest wage increases.

In our view, the 50 bp cut was always unlikely given that those sorts of cuts usually signal a recession is upon us. The economy seems set to remain at an above-trend growth rate, without inflation or wage pressure. Odds still favor a 25 bp cut on July 31, but any actions beyond that depend on the economic data, which could make the Fed’s communications strategy more difficult. Note this, however; if the Fed stops the rate cut cycle it will be for a good economic reason: growth is good.

For background on the fed funds target rate, please see page 34 of the Global Perspectives book.

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