Topline
There is heightened optimism the Federal Reserve will cut interest rates next month, with hopes boosted by a better-than-expected inflation report and Wall Street’s fear gauge falling to its lowest level this year, as the S&P 500 and Nasdaq jumped to new record highs Wednesday.
There are 99.9% odds the Federal Reserve will opt for a quarter-point reduction to interest rates, which have settled between 4.25% and 4.5% since December, after the agency’s policymaking meeting on Sept. 17, according to CME’s FedWatch tool.
Odds increased yesterday to just over 94% after the Bureau of Labor Statistics reported consumer prices increased 2.7% year-over-year in July, below economists’ projections of a 2.8% uptick, after nearing 86% a day earlier.
The CBOE Volatility Index (VIX), which tracks implied stock movements over the next month, dropped to below 14.40 early Wednesday, marking the lowest level for Wall Street’s barometer for market uncertainty since Jan. 24 (14.58).
Jeffrey Roach, LPL Financial’s chief economist, wrote Tuesday that despite core inflation—a measurement that excludes food and energy—hitting a six-month high while still above the Fed’s 2% goal, he expects the Fed to cut interest rates next month as they focus on the “weakening labor market,” as job growth has slowed over the last three months.
Michael Pearce, deputy chief U.S. economist at Oxford Economists, argued in a note the Federal Reserve will “hold off rate cuts another few months,” but noted another weak jobs report would likely “force their hand early.”
Both the S&P 500 and Nasdaq jumped to fresh all-time highs shortly after trading opened on Wednesday. The S&P briefly rose above 6,480, while the Nasdaq ticked over 21,803, boosted by gains among Paramount Skydance (23%), Warner Bros. Discovery (6.2%), Advanced Micro Devices (5.5%) and Tesla (1.9%). The Dow Jones Industrial Average added more than 400 points (0.9%), complemented by gains from UnitedHealth Group (3.7%), Nike (3.2%) and IBM (2.2%).
Interest rates influence lending costs and decisions for households and businesses, as lower rates often encourage people seeking mortgages or taking a loan for larger purchases. With lower rates, businesses may take advantage to expand, including by hiring new workers. The Fed tends to opt for interest rate cuts to help stabilize inflation and stimulate economic growth, as lower costs benefit businesses.
The Federal Reserve voted to hold interest rates between 4.25% and 4.5% in July, though two governors voted in favor of at least a quarter-point reduction. Fed governors Michelle Bowman and Christopher Waller have signaled support for easing interest rates in recent months, as Waller suggested, “With inflation near target and the upside risks to inflation limited, we should not wait until the labor market deteriorates.” Fed Chair Jerome Powell has leaned toward a cautious monetary policy, arguing the larger impacts of President Donald Trump’s tariffs on the economy are not yet known. Powell has said there were several economic reports ahead before the Fed considered a rate easement, with a focus on unemployment rates.
Trump has been critical of the Fed throughout his second term, often referring to Powell as “too late,” attacking the Fed chair and calling for him to go, while reportedly discussing naming his successor ahead of Powell’s term expiring in May 2026. “The damage he has done by always being too late is incalculable,” Trump wrote Tuesday, adding, “Fortunately, the economy is sooo good that we’ve blown through Powell and the complacent board.” Trump has called for interest rates to be cut as low as 1%, and previously expressed confidence Powell would “do the right thing,” though “it may be a little too late.”