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Markets are factoring in a 93% chance of an interest rate cut at the Federal Reserve’s meeting later this month. There’s an 82% chance of a rate cut after that in December.

But as we count down to the Fed’s decision on October 29, the story isn’t over yet. For one thing, there’s a government shutdown…

Key data on jobs and inflation won’t be available until agencies like the Bureau of Labor Statistics and the Bureau of Economic Analysis can get back to work.

There are no signs yet of a political breakthrough. So the data-dependent Fed could go into this month’s meeting without any current information on how inflation and jobs are tracking.

For a market hanging on those rate cuts, any hesitation or walking back of expectations in the coming weeks could lead to trouble…

A Divided Fed

The Fed’s September meeting made it clear just how divided the Fed has become.

A slim majority of officials expected two more 0.25% cuts this year. But it was far from a unanimous view. Nine out of 19 factored in just one or no further cuts for the remainder of the year.

And comments this past week make it clear that they remain divided…

Some governors recently warned about a “fragile” jobs market… and the damage to the economy if borrowing rates remain too elevated.

Yet several regional Fed presidents believe that the Fed needs to remain cautious and continue to “lean against” persistent inflation. By their reckoning, the jobs market is slowing down, but it remains sturdy without widespread layoffs.

And as Jerome Powell has consistently stated, the economy remains resilient.

Cutting rates would add another wave of demand before the supply side can catch up. And that would push inflation further away from the Fed’s 2% target.

So the path forward remains muddy…

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Market Expectations

The market is priced for perfection and seems to make a new high nearly every other day. So the real test will come if the Fed decides to hit the pause button.

Without access to key economic data, the Fed could choose to sit tight in October. (How can the Fed entertain rate cuts without the relevant data?)

And when a market expecting multiple rate cuts runs into a tentative Fed, it could really turn this rally on its head.

Those rate cut odds may seem confident now. But that could rapidly change.

As Paul Tudor Jones told CNBC this week, “All the ingredients are in place for some kind of a blow off… If anything, now is so much more potentially explosive than 1999.”

While recent headlines like the AMD/OpenAI deal might add some short-term froth to the market, eventually these companies will need to justify their crazy valuations.

And that’s reason enough to play things cautiously as we near a potential tipping point…

Happy Trading,

Larry Benedict
Editor, Trading With Larry Benedict

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