Interest rate cuts from the Federal Reserve may be on the way.
“The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks,” said Federal Reserve Chairman Jerome Powell last Friday.
However, Arlan Suderman, Chief Commodities Economist with StoneX, believes that rate cuts may not be as sharp—or should happen as often—as some are expecting.
“Right now, the market is pricing in expectations for a 25 basis-point rate cut in the September meeting, and I do think that will happen. I’m not necessarily in agreement with it,” says Suderman.
He believes that any rate cuts that happen this month will likely be made to appease the market.
“I think the Fed clearly knows what the market expects, and at the last meeting and the recent comments that have been made in public, it has done nothing to dispel that thinking of a rate cut in September.”
He also says a 50 basis-point rate cut for this month—which is half a percentage point—is unrealistic.
“Right now, I think the market would interpret that as, ‘Oh my, the economy must be in trouble’ if they did a 50 basis-point rate cut. Frankly, the data doesn’t support that, and the Fed continues to talk about being data-dependent.”
Suderman adds that the markets are pricing in larger rate cuts than that going forward.
“The market is pricing in a full 100 basis-point rate cut by the end of the year. So, that would be a full percentage reduction in the benchmark interest rate by the December meeting—and 200 basis points by next summer, by the July meeting, and I think that’s just frankly ridiculous.”
The Federal Reserve has been holding interest rates at 5.3 percent—the highest level in more than two decades. Officials will make their decision on cutting interest rates at their next meeting on Sept. 17 and 18.
