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Powell Sees Cooling Economy, Traders See Coming Rate Cut

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Tuesday, July 9th, 2024

Markets finished today’s trading session mildly mixed. This is pretty much how they greeted the opening bell this morning, with only the S&P 500 spending all day in the green. The Dow closed down -52 points, -0.13%, while the S&P and Nasdaq gained +0.07% and +0.14%, respectively. The small-cap Russell 2000 brought up the rear again today, -0.45%. It’s doubtful big market moves will happen before big inflation data comes out later this week.

Fed Chair Jerome Powell appeared to keep the door open to a future interest rate cut. This came as he gave testimony this morning before the Senate Banking Committee on Capitol Hill, where he noted the economy, after a year of keeping interest rates in the range of 5.25-5.50%, has “cooled considerably.” Powell said that we “no longer have an overheated economy,” though that should be obvious to anyone who can compare the current Inflation Rate to that of two years ago.

Powell stopped short of affirming a timeline for pending rate cuts. That said, because he acknowledged that keeping current high-rate policy too long “could unduly weaken economic activity and employment,” analysts paying close attention to Powell’s comments seem to deduce a September cut is more likely than not. This means the Fed is not expected to move at the next Federal Open Market Committee (FOMC) meeting at the end of the month. The FOMC does not meet during the month of August.

Interest rates, prior to July 2023, hadn’t been at 5.5% since March 2001. Recall this was back when the business-led recession took some air out of the dot-com bubble; we were still half a year before the tragedy of 9/11. Thus, even though there was some speculation earlier this year that further rate hikes may have been warranted, that train of thought has been completely scrapped. We are currently looking toward September for when the next leg in the “soft landing” scenario takes place.

Tomorrow morning at 10am, Powell heads across the rotunda. He’ll testify before the House Committee on Financial Services, and likely lean on the same talking points he used before the Senate this morning. However, the different houses of Congress are run by differing parties — Democrats in the Senate, Republicans in the House — so the line of questioning may be somewhat different. In any case, if today’s testimony did not augment trading behavior today, it’s unlikely tomorrow’s will, either.

Speaking of the Inflation Rate, as we were a moment ago, this week we’ll get an update. Thursday morning, when all the Consumer Price Index (CPI) data for June comes out, it will include a fresh Inflation Rate (aka headline CPI year over year). Expectations are for a further pullback — around 20 or 30 basis points (bps) from the +3.4% posted in May, which itself was the lowest monthly print in more than three years. Even if it stays steady month over month, it will be 140 bps lower than the +4.8% Inflation Rate we saw in June of 2023. September of 2022 brought us the highest Inflation Rate in recent years: +6.6%, more than double present expectations.

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