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Recent developments suggest that the Federal Reserve may finally tighten its monetary policy, translating into a rate cut in September. The main question now is how big the regulator’s move will be.
What is the reason for this expectation? First, the July FOMC meeting minutes showed that most members believed that if the data stayed on track, a rate cut at the next meeting would probably be the right move.
This suggests that maintaining such a restrictive policy may not be necessary, especially as it continues to pressure households and businesses, and delinquencies and defaults remain high.
For instance, credit card debt has reached a record $1.14 trillion, up 5.8% from last year, and delinquency rates stand at 9.1%. This does not mean a significant collapse is looming, nor is it optimistic.
Later, Fed Chairman Jerome Powell echoed this sentiment, saying it is time for policy tightening. As a result, markets have become more optimistic, helping the S&P 500 end the week up +1.3%.
The debt market also benefited, with bond yields falling by 10 to 15 basis points, bringing the 10-year Treasury yield to 3.8%. Overall, market sentiment remains extra positive.
However, it is essential to remember that the FOMC is unlikely to opt for a 50 basis point rate cut, even with the recent tightening in non-farm employment. Therefore, being overly optimistic may be premature.
For those who missed it, the data was revised by 818,000 for the year through March 2024, the largest correction since 2009. This suggests that things might not be as smooth as they seem.
While Powell didn’t specify the pace of tightening, other FOMC members have emphasized the need for a “gradual” approach to rate cuts, supporting a 25 basis point reduction in September.
However, Powell also noted that the FOMC “does not want additional cooling in the labor market,” so the upcoming employment reports will be crucial for deciding the next steps.
