The odds of a 50 basis point cut jumped from 15 percent on Wednesday to 59 percent Sunday evening.
A month ago I expected a 50 basis point cut by the Fed based on weakening data.
The data weakened alright, but following the the CPI report last Wednesday, I checked the odds at 15 percent.
Late Sunday, I decided to check the probabilities again and captured the above chart.
There was a huge rally in the odds on Thursday and Friday as noted by the Wall Street Journal in the chart below.
For and Against a Half-Point Cut
Let’s recap recent data.
September 6: Payroll Report: Manufacturing Sheds 24,000 Jobs, Government Adds 24,000, Big Negative Revisions
September 9: Fed Beige Book Conditions Are Worse Now Than the Start of the Great Recession
The current economic headline conditions are worse than the conditions heading into the 7th month of the Great Recession.
However, the jobs report and the Beige Book were factored in to the rate cut odds ahead of the CPI report.
On September 11, I commented The Cost of Rent Up 0.4 Percent Again, CPI Rises 0.2 Percent in August
I expected rent and OER to moderate. They didn’t. The CPI rose 0.2 percent month-over-month but fell to 2.5 percent year-over-year.
Had shelter cooperated, the gain would have been much lower, which is what I expected.
However, rent and owners’ equivalent rent (OER) rose 0.4 percent and 0.5 percent respectively. OER is the price of rent someone who owns a home would pay if instead they rented their own home.
Other than shelter, this was a very tame report. But shelter is over a third of the index.
On September 12, I commented A Rate Cut Friendly Producer Price Index Report Follows the CPI Report
I called it rate cut friendly but an amusing headline on Investing.Com proclaimed US stocks choppy following hotter-than-expected PPI reading
The report was not hotter than expected. Factoring in revisions, it was weaker than expected, but not hugely so.
Import Prices Drop 0.3 Percent, Export Prices Plunge 0.7 Percent
On September 13, I commented Import Prices Drop 0.3 Percent, Export Prices Plunge 0.7 Percent
Economists did not see this one coming. The consensus for export prices was -0.1 percent. And there was a negative revision to export prices.
Since July, I expected the data to weaken enough for the Fed to cut 50 basis points.
Import-export prices and the PPI report might be enough. We find out on Wednesday.
Reflections on the Fed’s Dual Mandate
I do not believe there should be a dual mandate.
Heck, I don’t think there should be a Fed. Nor do I think a goal of 2 percent inflation is a good idea, even if accurately measured.
But I didn’t create the mandate, Congress did. And that mandate gives the Fed cover to do whatever it wants.
On September 14, I addressed the question Understanding the Fed’s Dual Mandate, Should the Fed Cut Rates?
The overwhelming answer by economists to the opening question is yes. Your mileage may vary.
Looking Ahead
Underlying inflation pressures are huge. Given neither party’s willingness to do anything to fix out of control spending, it’s the recent decline in the rate of inflation that’s transitory, not the increase in inflation.
It’s not a pretty picture no matter who wins.
But on Wednesday, the Fed can do whatever it wants and justify that on the basis of its dual mandate. If the Fed does cut by a half-point Republicans will scream.