It really is unusual for markets to be so uncertain, so close to the actual decision as to what the Federal Reserve is going to do with interest rates. I love it. It's very old school!
We were literally at almost 50-50 yesterday in terms of the market's odds for a half-point versus a quarter-point rate cut. Bank of America's quant team crunched the data; this is the most uncertain Fed meeting since at least 2015. (They used the odds of a quarter-point cut as of three days before the decision as their criteria.)
I thought, when I saw the retail sales report this morning, that it would quickly solidify the case for just a quarter-point cut. It was better than many feared, and is the last major datapoint before the Fed's decision tomorrow. Sales rose from July, with the "control" group that feeds into GDP up a healthy 0.3%, with upward revisions to July. No "weakening consumer" narrative here, with spending on track for a 2.6% annualized gain this quarter, per Oren Klachkin at Nationwide.
But the market is going the other way, pressing bets on a half-point cut tomorrow. Those odds rose to 65% after the data this morning. Traders appear to be reading the financial-press tea leaves, which are certainly leaving the door open to a bigger-sized cut.
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If you're weary of the whole "25 or 50" debate, Tom Hancock at GMO made me chuckle yesterday when he said, quite rightly, "I wish they could just go 30. That would be perfect!" And why not? Imagine the markets trying to digest a Fed that gave them exactly what they were pricing for...but in a form they've never before seen.
And it's not entirely unprecedented, either. The European Central Bank just the other day cut their refinancing rate by 60 basis points. But that was an effort to shrink the gap that had developed between it and their lower deposit rate, which as a result was dissuading banks from lending to each other.
Plus, the current Fed funds rate is actually 5.33%, the result of the "range" that the Fed has set rates in for years now, ever since rates had to get as close to zero as possible. It's probably time to retire that framework, but what do I know?
Money Report
Perhaps the Fed could clean it all up by announcing it was jettisoning the range, and setting the new target for Fed funds to a simple, round 5%. And voila! A 33-basis-point rate cut, just as the markets are priced for.
See you at 1 p.m...
Kelly
