Fed Rate Cut Speculation Influences Sentiment | Episode 153 | 07-10-24

Is the Federal Reserve gearing up for a rate cut as early as September? Join us on today's episode as we review Chairman Jerome Powell's latest testimony to Congress. We'll dissect his comments on inflation and interest rates, and why his cautious optimism toward the 2% inflation target is making waves in the financial markets. Also, with a cooler job market on the horizon, investors are buzzing about the possibility of a rate cut sooner than expected. We'll explore the delicate balance the Fed is maintaining to ensure both economic stability and inflation control.

We'll also look at the potential consolidation within the small and mid-cap banking sectors and the political ramifications of the Fed's decisions. With the crucial CPI and Producer Price Index reports just around the corner, we'll discuss their potential impact on the Fed's future actions. Stay tuned for our in-depth analysis and insights, and don't forget to send your questions and comments to podcast@verdence.com.

The Fed gave us some more market-friendly news in the past couple of days. So the Federal Reserve had their semiannual testimony to Congress, where they spent two days basically taking a ton of questions from both Senate leaders as well as House leaders, and I'm just going to go over some of the comments that have come out of the past two days. It is Wednesday, july the 10th, and tomorrow we will get the much anticipated CPI report. So if these comments today that the Fed has made, I said yesterday and today we'll see if it's followed up by a cooler inflation reading. But let's just dig into some of these comments. So nothing really market moving out of this. Nothing changed really from what they've said recently, except he just continued to reiterate that we were getting closer to that inflation. They did keep themselves kind of straddling that line, like they have in the past, that they are not yet sufficiently confident that it's moving to 2%. But they've gotten much more data and it is giving them some more confidence. Where the market has rallied the equity market today is primarily on the fact that they made some comments about the job market and how the job market has cooled. They said considerably. So investors are taking that as cues that the Fed will be able to cut rates as early as September. They did mention that the number one thing keeping them up at night really was that keeping that inflation and labor balance. So the fact that they've mentioned that the labor market is cooling considerably has people thinking that they're going to cut rates. They um.

Some of the other comments were surrounding their balance sheet and they have slowed their trimming of the balance sheet a bit just to let the markets absorb that. But they did make note that they would have to pick this up. Um, there's more work to do and they have good ways to go. They have trimmed their balance sheet by about almost $2 trillion, so they are getting it better, but they still do have a long way to go. They did make some mention about the banks. They were asked about the banks and they did say that and what Federal Jerome Powell said was that he wouldn't stand in the way, basically that there does need to be some more consolidation in the banks and this is something that we've talked about as well specifically in the small and mid cap banking sector, where there is still strain and we don't think that's completely gone. We think there'll be further consolidation in that area and the Fed has basically said they won't stand in the in the way of that.

And lastly, there's a lot of concern that if they do cut in September it'll look political. And if inflation is not getting considerably better and they do cut rates, then, yes, I agree it would look political. But he did say that it is not political any of the decisions that they make and that he has not spoken to President Biden since 2022. So again, trying to make sure that he is assuring people that he has not spoken to President Biden since 2022. So again, trying to make sure that he is assuring people that this is not politically motivated, regardless of when they cut interest rates, we still think that September is a little too early.

Again, we'll see tomorrow, Thursday, we get that CPI report. Let's see what we get out of that report. If it's a big surprise to the upside, or even a little surprise to the upside, where it comes in hotter than expected, all this will just reverse itself. So we'll be taking a very close look at that report and then Friday, we'll get the producer price index as well. So we'll be back to report on some of the inflation stuff. If you have any questions or comments. Please feel free to reach out to podcast at verdence. com. Thank you.