This was the week investors were supposed to get some clarity on how much the Federal Reserve will cut borrowing costs later this month.
But heading into market close on Friday, the central bank's plans appeared as unclear as ever.
With the blackout period before the Fed's meeting about to begin, investors still don't have a clear idea of the size of the first rate cut, creating a potentially “tricky” situation investors must now navigate, according to Brent Donnelly of Spectra Markets.
“This week was supposed to provide clarity as NFP, Williams and Waller were expected to set either 25 or 50 bps at the September FOMC meeting. However, we are now in a Fed blackout period and it's still unclear whether it will be 25 or 50 bps. It's difficult. Right now prices are leaning toward 25 bps but it's not clear,” Donnelly said in comments emailed to MarketWatch on Friday.
Federal funds futures were volatile early in trading, with traders most recently expecting a 25 basis point rate cut in September in response to comments from Fed Governor Chris Waller, only to see the opposite happen just hours ago, according to CME Group data.
Investors may get further clues next week when August consumer price data is released, but as Federal Reserve Chairman Jerome Powell suggested in comments at the Jackson Hole Economic Symposium late last month, the central bank's focus has now shifted to the labor market, with inflation appearing to be largely contained.
When it comes to how worried investors should be about an economic slowdown, Donnelly said the latest data leaves a lot of room for interpretation and disagreement. The two most widely held views are:
“We are continuing to see a soft landing and we will return to a 2017/2018 type economy.”
“A hard landing is underway, the labor market is weak and the Fed is lagging behind.”
“Choose your own adventure,” he pointed out.
Meanwhile, stocks were on track Friday to close out the worst week for the S&P 500 since the Silicon Valley Bank collapse in March 2023. But market weakness at this time of year is expected given seasonal history, Donnelly added.
