At the June FOMC meeting, the dot plot originally rejected the view that three rate cuts might be possible this year, suggesting that only one rate cut is most likely this year. But considering the recent macro data and financial market trends, this view may be outdated. We expect the Fed to keep monetary policy unchanged at the FOMC meeting early Thursday morning, but will send the clearest signal of rate cuts so far and put it into practice at the FOMC meeting on September 18. The reason is that inflation and consumer spending are cooling in recent months, while unemployment is rising. In terms of inflation, both the CPI and PCE indexes in the first quarter are still too hot, but the data in May and June have slowed down significantly, especially seeing the easing trend in housing and rents. In addition, the unemployment rate has risen from a low of 3.4% in April last year to 4.1% in June, and the decline in the labor market has exceeded the Fed's forecast in June. The Fed has been seeking to achieve a "soft landing", and if the data supports them, a rate cut in September will be the right window to avoid a collapse of the economy and financial markets.
Nick, known as the "Federal Reserve's mouthpiece," mentioned in an article recently: "This interest rate meeting was basically a discussion about the September rate cut. There will be no rate cut in July but the expectation of a September rate cut will be released. Considering sending a rate cut signal reflects three factors: improved inflation, a cooling labor market, and considerations for a soft landing of the economy." Of course, all these expectations still need to be confirmed by the inflation reports in July and August, which is a necessary condition for a September rate cut.
The bond market is ready for the first rate cut in the future, with the 10-year and 2-year yields approaching 4% at the same time, and the curve flattening. The spread between the 10-year and 2-year Treasury yields has also narrowed to -18 basis points. This means that the two-year long-short bond interest rate inversion is gradually being resolved, because short-term bond interest rates are more sensitive to adjustments in the federal benchmark interest rate and fall faster, and the bond market recognizes the approach of a rate cut. Traditionally, once the interest rate inversion is resolved, the market is fully prepared for the first rate cut and the beginning of a series of rate cuts.
Correspondingly, the Russell 2000 Index is a barometer of the stock market's expectations for rate cuts. RUT started against the trend after the positive CPI was released last month, and remained strong even against the backdrop of a pullback in big tech stocks. It was also the first index to recover lost ground in the U.S. stock market pullback in the past two weeks. The IWM ETF tracking the Russell 2000 even recorded the second-largest inflow in history last week. From this perspective, expectations for rate cuts remain strong, and funds continue to flow into small-cap stocks and cryptocurrencies.
