Between 9:02 am and 11:26 am, the CME FedWatch tool reflected an increase in the chances that the Federal Open Market Committee would increase the federal funds target range by 50-basis points. Traders expect a 61% chance of a 50-point increase. Chances of a 25-point increase has slipped to 39% at the time of this writing.
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Three U.S. senators have urged that the FOMC increase rates by 75-basis points. Yahoo! Finance today reported that U.S. Senators Elizabeth Warren, Sheldon Whitehouse, and John Hickenlooper via a letter delivered today to Federal Reserve Board chairman Jerome Powell argued that if the Federal Reserve is too cautious in cutting rates, there is a risk that the economy could head to a recession.
The senators’ rationale for front loading cuts of this size is that employment numbers, statistically a lagging indicator, adjust slowly, so to avoid a hard landing crisis in labor, large cuts should be implemented now.
There is some precedent for such a move …. but in the opposite direction. In 2022, the Federal Reserve embarked on four consecutive rate hikes of 75-basis points each in part to address inflationary pressures during what Chairman Powell referred to as a transitory period for inflation.
One notable contrarian to rate cuts is Peter Schiff, chief economist and global strategist for Europac.com. Mr. Schiff believes that rates are too low and a cut in the fed funds rate will only lead to quantitative easing which would lead to more debt while sending consumer prices higher.
Given that we are in the silly season of politics, I don’t expect any legislation or executive orders designed to impact the FOMC’s decision-making process on the fed funds rate. While former president and Republican presidential candidate Donald J. Trump has signaled a willingness to actively press for more involvement in the rate setting process, Vice President Harris has indicated she would accept the decisions of the FOMC in deference to a politically independent Federal Reserve.
The Federal Open Market Committee commences its two-day monetary policy meeting tomorrow.
Alton Drew
16 September 2024
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