Fed Rate Cuts Are Set for Launch

Rates fall to close out inflation week. Swap rates reversed course today after rising the past two sessions on slightly elevated inflation figures. Rates fell 1-6bps across a bull steepening curve, cementing a 4-10bp decline over the past five days. Meanwhile, the S&P 500 rose for the fifth consecutive session, up 0.54%. All eyes are on next week’s FOMC meeting, where the Fed is essentially guaranteed to cut policy rates for the first time this cycle.

How large will next week’s rate cut be? While a rate cut has long been priced in for September’s FOMC meeting, the size remains in question. Fed Funds futures are almost 50/50 between a 25bp and 50bp move, a shift from the beginning of the week where markets leaned toward a 25bp cut. Concerns about the labor market seem to have outweighed this week’s inflation data, which showed that consumer and producer prices were higher than expected in August. The Fed will announce their highly anticipated decision on Wednesday.

University of Michigan data shows elevated consumer sentiment and mixed inflation expectations. According to preliminary September data, consumer sentiment rallied back to 69.0, its highest level since May and a 1.1 increase from October. Surveys of Consumers Director Joanne Hsu stated that the increase was led by more favorable prices for durable goods and improved year-ahead expectations for personal wealth and the economy. Meanwhile, short-term and long-term inflation expectations were below and above estimates, respectively. 1-year expectations were 2.7% vs. 2.8% forecasts while 5-10-year was 3.1% vs. 3.0% forecasts.