The futures prices on Monday reflected that investors expected a 50 basis point rate cut from the Fed this week, with a probability of close to 60%. Blackrock said the market's pricing of the rate cut cycle was a bit overdone, while a joint letter from Democratic senators warned that being too cautious about the rate cut would unnecessarily expose the economy to the risk of a recession.
The financial markets' expectations for a 50-basis-point rate cut by the Federal Reserve this week have repeatedly intensified, but U.S. lawmakers are urging for a much larger cut beyond the usual measures.
A letter issued on Monday, September 16, Eastern Time revealed that three Democratic senators, Elizabeth Warren, Sheldon Whitehouse, and John Hickenlooper, jointly wrote to Federal Reserve Chairman Powell, urging for a 75-basis-point rate cut at the latest Federal Open Market Committee (FOMC) meeting on September 17th to 18th. The senators stated in the letter that they have been calling for rate cuts for the past few months, and the delay in action by the Federal Reserve has jeopardized the U.S. economy, as they believe the Fed is falling behind the circumstances.
In addition to mentioning that inflation is apparently falling towards the Fed's target of 2% as Powell hoped, the aforementioned joint letter also cited a recent column article by Reuters indicating that inflation may soon dip below the Fed's 2% target. Considering Powell's testimony in July before the Senate, where he stated that 'high risks are not the only risks we face,' delaying or insufficient rate cuts could unnecessarily weaken economic activity and employment. Given the slowdown in employment data, the Federal Reserve should act decisively from the outset and make significant rate cuts to prevent a potential economic recession.
At the end of the joint letter, the three senators point out:
"If the Federal Reserve is too cautious in cutting rates, it will unnecessarily face the risk of economic recession. The (FOMC) committee must consider implementing rate cuts more proactively in order to reduce potential risks in the labor market."
Commentators believe that the above joint letter highlights the tricky political backdrop the Federal Reserve is facing. While Fed officials have repeatedly claimed that monetary policy will not be influenced by domestic political factors, they are still under scrutiny from various political corners.
It is worth noting that a 75-basis-point rate cut is higher than the market's expectations following the escalating expectations for rate cuts. On Monday of this week, after senior Federal Reserve reporters from The Wall Street Journal and the Financial Times suggested the possibility of a 50-basis-point cut, the financial markets further increased the probability of the Fed announcing a 50-basis-point cut after its meeting on Wednesday.
The trading price of the swap contract linked to the Federal Reserve's decision on Wednesday showed that investors expect a probability of more than 50% for a 50 basis point rate cut, which was almost negligible last week. The pricing of the swap contract on Monday also showed that investors expected a total rate cut of about 118 basis points by the end of the year.
According to the calculation data from LSEG, the Federal Funds Rate Futures price on Monday already reflected a close to 60% probability of a 50 basis point rate cut by the Federal Reserve on Wednesday. The yield of the two-year Treasury notes, which are sensitive to interest rates, had fallen below 3.53% before the pre-market trading on Monday, hitting a new intra-day low since September 2022.
Some strategists at BlackRock warned on Monday that the market's speculation on the magnitude of the rate cut by the Federal Reserve is unlikely to materialize. BlackRock's Chief Investment Strategist Wei Li said that the speculation that the Fed would be forced to accelerate its rate cuts due to the delayed easing is inaccurate, and she expects the Fed to only cut rates by 25 basis points on Wednesday. She said, "We believe that the market has priced in the depth of the rate-cutting cycle a bit too much. The rate-cutting cycle is about to begin, but it may not be as deep as the market expects."
"We believe that the market has priced in the depth of the rate-cutting cycle a bit too much. The rate-cutting cycle is about to begin, but it may not be as deep as the market expects."
Editor/Lambor