Market expectations for the Fed’s interest rate cut continue to heat up, but sentiment is not as sluggish as it was earlier. Last week, Powell released remarks that were generally interpreted as a signal of interest rate cuts at Jackson Hall annual meeting, driving US stocks to rise sharply and US Treasury yields to decline simultaneously. KVBPRIME’s official website analyzed that this scenario typically reflects the rapid progress of “loose trading”. However, the relevant popularity has not continued. The market atmosphere has fallen rapidly this week, and investors have begun to evaluate the logic behind the interest rate cuts and their possible impacts.
At present, the market generally believes that the probability of interest rate cuts in September is quite high, and futures pricing has almost locked in an adjustment of 25 basis points. But outside this “benchmark scenario”, the differences are quite obvious. Some investors believe that this is more like a preventive operation and will not start a radical easing cycle. From the decline in the probability of interest rate cuts in October and the decrease in the number of expected times throughout the year, it can be seen that the market does not fully agree with the possibility of continued easing.
The focus of the controversy is whether the interest rate cut is really necessary. There are no clear signs of recession in the economy, and the uncertainty of inflation remains. If the policy is relaxed too early, it may be restricted by price pressure. At the same time, the interference of political factors has also made the outside world worry about the Fed’s challenges in independence. Even if interest rate cuts are implemented, some people believe that the stimulus effect may be short-term and limited in the absence of downward pressure on the economy.
Another mentioned risk is that interest rate cuts may not necessarily lead to a decline in long-term interest rates. A similar scenario occurred last year. After the Fed released a signal of loosening, long-term yields rose due to market concerns about inflation. The result is that mortgage interest rates and financing costs have not declined as expected. If a similar situation occurs again, the interest rate cut may go against your expectations.
Although there are many doubts and there are still bullish voices in the market, the logic has changed. Some views believe that the rise in US stocks should not rely on liquidity drive, but depends on the stable performance of corporate profits. If profits continue to improve, the stock market may still maintain an upward trend even if monetary policy turns cautious. In other words, the power that truly supports the market should come from fundamentals, rather than simply expecting interest rate cuts.
