Today is like Christmas morning for markets: Will they be granted their wish for December and have a final interest rate cut for the year delivered by Santa Jerome Powell? So far, the signs are pointing to yes.Investors priced in an 87.6% likelihood of a reduction from the Federal Open Market Committee (FOMC) this afternoon, down by 25 basis points to 3.5% to 3.75%. The data has been laying the tracks for such a cut, though speculators also warned last week ahead of the Fed meeting that the committee may be more divided than usual in their outlook on the economy. After all, the Fed has two key mandates: maintaining price rises at 2% and ensuring the unemployment rate remains stable. These priorities are increasingly conflicting. Inflation is sticky at 3%, while the unemployment rate has risen to 4.4% in the past few months.
So while a Fed cut often gives markets a boost because it means an influx of cheaper borrowing and, as a result, greater economic activity, it seems a rate cut this month may be more about steadying the ship as opposed to strengthening the currents running beneath it.
The cut is “probably not meant to be stimulatory,” said UBS chief economist Paul Donovan in a note to clients this morning. He said: “It would be strange to stimulate as U.S. inflation creeps higher, and most projections suggest it has higher to go before it peaks. However, there is little that the Fed can do to directly change the inflation consequences of either supply shocks or trade tariffs. It could offset them by causing deflation in other areas of the U.S. economy, but that might be considered an excessively high amount of economic damage to levy.”
