Fed Poised to Cut ‘Dovish’ 25bp Next Week, But Risks Pressure for More Cut in November By Investing.com

Investing.com — The Federal Reserve looks set to deliver a “comfortable” quarter-point interest rate cut next week, leaving the economy exposed to the risks of weaker economic data that could pressure the central bank into a reactive cut of 50 of basis points in November.

The clear base case, however, is a “25 dovish” that tapers off a bit, leaving the Fed, markets and the economy exposed to a meeting period that generates a mix of weak and scarier data and likely ends with the Fed offering a 50 in November ,” Evercore ISI said in a note.

The 25bp cut, rather 50bp, is not a risk on the day, but in the 7 weeks to the November meeting. During this meeting period, any bad macro news – such as a September jobs report – would likely be met with concerns that the Fed is behind the curve and a recession could be on the horizon, triggering a shock to the index of financial condition that could also transform a close election.

“There is a high risk of weak news around this time, as political uncertainty favors cushioned spending, cautious hiring and perhaps a bit more layoffs,” it added.

Still, signs of slowing inflation, as evidenced by recent producer price index data out Wednesday, leave the door open for the dovish surprise of a bigger rate cut in September.

“Recognizing that the Fed can surprise dovishly right now, while it can’t surprise hawkish, we think PPI supports a lingering possibility of a 50 starter, which would risk less with the soft landing,” it added.

The recent producer price index for August came in hotter than expected, but showed weak components in line with the preferred measure of PCE inflation, suggesting inflationary pressures may be easing. Although that may have eased jitters from the FOMC following a core CPI print for August that beats estimates, Evercore ISI believes. Fed officials “will be more sensitive to the housing services trend than the volatile components of PPI inflation.”

August’s headline and core PPI, the latter food and energy, came in slightly ahead of expectations on a monthly basis, printing at 0.2% and 0.3%, compared to 0.1% and 0.1% respectively. 0.2% expected.

Markets are currently pricing in a 25 bps rate cut after the Fed concludes its Sept. 17-18 meeting, with the odds of a 50 bps cut at about 26 percent, according to Investing.com.