Dow Jones Industrial Average (DJIA) futures popped 68 points higher in early trading Monday, pointing to a strong stock market open. It comes as US Federal Reserve chairman Jerome Powell readies his third-straight interest rate cut.
Traders are pricing in a 94% chance of a rate cut on Wednesday, but disappoint may lie ahead. If Powell stands pat or indicates the end of this easing cycle, the stock market could drop precipitously.
“If the Fed were to disappoint the markets by not cutting next week, I think we could see a pullback of anywhere from 3-5%, but it all depends on how the Fed communicates their decision” – Chris Zaccarelli, Chief Investment Officer, Independent Advisor Alliance.
According to CME’s FedWatch tool, investors are pricing in a 94% chance of a quarter-point rate cut at the Federal Reserve at Wednesday’s FOMC. It would mark the third-straight cut at the hands of Powell in 2019, bringing the target rate down to 1.5-1.75%.
The move, which investors hope will lower chances of a recession, would certainly please President Donald Trump who once again pushed for Powell to cut rates and even begin a new round of quantitative easing.
“The Federal Reserve is derelict in its duties if it doesn’t lower the Rate and even, ideally, stimulate. Take a look around the World at our competitors. Germany and others are actually GETTING PAID to borrow money. Fed was way too fast to raise, and way too slow to cut!”
While the consensus among traders points to a rate cut on Wednesday, there’s no guarantee the Fed will act. Voting members of the central bank remain split on whether to cut rates again. As the Wall Street Journal reported:
“Seven of 17 officials penciled in one more rate cut this year. The other 10 were split evenly between those who thought the new level of rates, after Wednesday’s cut, would be appropriate through the rest of 2019 and those who thought rates shouldn’t have been cut.”
Even if the Fed does cut, traders will be eagerly watching the comments of chairman Powell for future direction. He has repeatedly said this current round of easing is just a “mid-cycle adjustment,” which is consistent with three cuts. In other words, there might not be much appetite for further easing.