## Fed Rate Cut Almost Certain, But Election Uncertainty Looms Large: What Investors Should Watch
The market is practically betting the house on a rate cut at the Federal Reserve’s November 7 meeting. With the customary pre-meeting blackout period in effect, where Fed officials remain silent on policy decisions, investors have upped their bets on a rate cut, currently assigning a 96% chance to a quarter-point reduction, according to the CME FedWatch tool. This strong conviction is driven by a belief that the U.S. economy can sustain job growth without triggering new inflationary pressures, suggesting the Fed might gradually ease its policy tightening.
However, the upcoming presidential election, just two days before the Fed’s decision, adds a significant layer of uncertainty to the economic landscape. Investors are eager for clarity on the economic policies each candidate plans to implement, especially concerning the growing U.S. budget deficit. The International Monetary Fund (IMF) projects that the U.S. deficit will continue to widen, raising concerns about long-term fiscal stability and potential repercussions for monetary policy.
Economic Data to Watch:
Next week, key economic data releases will provide further insight into the Fed’s thinking. The Personal Consumption Expenditure (PCE) price index for September, a crucial inflation indicator, will be closely scrutinized. The October official labor statistics will also be eagerly awaited, but could exhibit volatility due to the impact of hurricanes and strikes on employment growth and the unemployment rate.
Mixed Views Within the Fed:
While a rate cut appears likely, the path and urgency of further reductions remain points of debate among Fed officials. Some, like Minneapolis Fed President Neel Kashkari, anticipate “modest cuts” in the coming quarters, while others like Atlanta Fed President Raphael Bostic advocate for caution and a wait-and-see approach. However, multiple Fed officials, including San Francisco Fed President Mary Daly and Dallas Fed President Lorie Logan, have indicated support for continued gradual rate reductions.
Recent Market Performance:
September’s 50-basis-point rate cut injected optimism into U.S. equity markets, pushing major indexes upward. The S&P 500, tracked by the SPDR S&P 500 ETF Trust (SPY), has climbed roughly 3% since September 18, reaching a peak on October 17. The tech-heavy Nasdaq 100, mirrored by the Invesco QQQ Trust (QQQ), experienced an even stronger rally, gaining around 4% during the same period.
While the market celebrates recent rate cuts, the upcoming election’s impact on investor sentiment remains a significant unknown. The election’s outcome could significantly influence economic policy and the path of interest rates, making it a pivotal factor for investors to consider in the weeks ahead.