With the biggest market event of the summer just a little over two weeks away, traders and investors remain fixated on Jay Powell and the Federal Reserve. Despite the bond market’s near-perfect pricing of a July interest rate cut, keen observers were reminded this past week that those chances can change.
The probability of the July move being a 50 basis point cut dropped from almost a quarter-percent to near zero after the impressive Friday jobs report. Even the chances of a single cut showed the tiniest margin of vulnerability yesterday, dropping from 100% to – hold on for this one – 99.5%. The bottom line is today’s testimony to Congress, Fed minutes, and Friday’s CPI report are a few of the final remaining events on the calendar between now and the July 31 meeting that have the potential to alter investors’ view of what comes next for monetary policy.
But will today provide an opportunity for Powell to say anything different? From the prepared remarks, the cut now seems certain. Language about a dimmer outlook sent gold jumping and bonds rallying. The possible catch? There’s likely to be some focus on the relationship between President Trump and Powell. The President has repeatedly blasted the Fed chair for being too aggressive in policy and is pushing for a more European-style easiness in the rate path. Will Democrats frame a cut as caving to political pressure? It would be an interesting tactic to today’s Q&A to pressure the chair to not cut rates. After all, any meaningful drop in the chances of an incoming cut and markets are sure to be in a bit of hysteria. That may be one way for the President’s political opponents to box him into a corner.
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