Now that inflation is down substantially from its peak two summers ago, the Fed believes it can shift its focus more toward protecting the job market and economy. The only question is how much the Fed will cut rates by, and that is a delicate balancing act.
While lowering rates gives a boost to the overall economy and to financial markets, it can also give inflation more fuel. Some critics say the Fed is already moving too late to help the economy, while others warn of inflation staying stubbornly higher than it has in the past.
The general expectation on Wall Street is for the Fed to deliver a larger-than-usual cut of half of a percentage point on Wednesday, according to data from CME Group. But it’s not a certainty. Traders are still betting on a 35 per cent probability for a traditional-sized move of a quarter of a percentage point,
Economic reports released Tuesday did little to change those expectations. One said US shoppers spent more at retailers last month than expected. That’s an encouraging signal indicating strength for the heart of the US economy, but details underneath the surface may have been more discouraging. After ignoring automobiles and fuel, sales at US retailers last month were a touch weaker than economists expected.
“This data isn’t going to decide the issue for the Fed, one way or the other,” Chris Larkin, managing director, trading and investing, at E-Trade from Morgan Stanley, said about the size of Wednesday’s rate cut.
A separate report that came later in the morning said US industrial production returned to growth in August and was stronger than economists expected.
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In the bond market, the 10-year Treasury yield rose to 3.64 per cent from 3.62 per cent late Monday. The two-year yield, which more closely tracks expectations for the Fed’s actions, rose to 3.59 per cent from 3.56 per cent.
In stock markets abroad, Japan’s Nikkei 225 fell 1 per cent after the value the Japanese yen ticked higher against the US dollar.
The yen has been rising on expectations the Bank of Japan will continue to head in the opposite direction of the Federal Reserve and keep raising interest rates. A stronger yen can hurt the profits of Japan’s big exporters.
