The Market May Be Too Aggressive on Fed Rate Cuts
Current expectations of policy easing go beyond what is both likely and desirable.
Seeking direction.
Photographer: Michael Nagle/Bloomberg
The inflation numbers this week — both for producer and consumer prices — have served to reassure markets in two distinct ways: confirming continued progress in the battle against high price increases and supporting the ongoing shift in the Federal Reserve’s focus from its inflation mandate to its employment mandate. This leaves the door wide open for an interest rate cut in September, but it does not support the terminal rate that the market is pricing. Indeed, that destination looks about half a percentage point too low.
The producer price data released on Tuesday were softer than consensus forecasts, both at the headline level and after stripping out the volatile food and energy categories. This good news triggered a significant stock market rally and a noticeable drop in government bond yields. These market reactions were further validated by Wednesday’s consumer price numbers, which essentially met consensus forecasts. The headline measure, rising 2.9% in July from a year earlier, had a two handle for the first time since 2021.