US GDP Weighs On Federal Reserve’s September Rate Cut Bets, What’s Next?
Highlights
- US GDP growth of 2.8% surprises markets, potentially impacting the Fed's decision.
- Strong economic data may lead to a stricter policy stance from the Federal Reserve.
- Market expectations for the September rate cut dropped to 85% after the GDP release.
The recent US GDP data has cast a shadow on the Federal Reserve’s anticipated rate cut in September. With the Gross Domestic Product rising to 2.8% in Q2 from 1.4% in Q1, market sentiments appear to be shifting. This unexpected economic resilience has led to a reconsideration of the central bank’s policy direction while dampening the market hopes.
US GDP Data Weighs On Market Sentiment
The latest US GDP figures have surprised many, showing a robust 2.8% growth in the second quarter. The data came in significantly higher than the 1.4% growth seen in the previous quarter and market expectations of 2%.
Meanwhile, this indicates that the US economy is withstanding the pressure of higher interest rates better than anticipated. Having said that, such resilience may prompt the Federal Reserve to maintain its strict policy stance longer than expected.
This sentiment is echoed in the markets. As Fox Business’ senior correspondent Charles Gasparino highlighted, it’s challenging to justify a rate cut in September with such strong GDP data unless there are other influencing factors, like US political considerations or adherence to forward guidance.
This perspective underscores the complexity of the Federal Reserve’s decision-making process amid fluctuating economic indicators.
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What’s Next?
The CME FedWatch Tool, a crucial barometer for gauging market expectations regarding Federal Reserve policy, has shown a shift in investor sentiment. Before the US GDP data release, there was over a 90% probability of a rate cut in September.
However, this probability has now dropped to around 85%, reflecting the growing uncertainty among investors about the Fed’s next move. In other words, investors are now more cautious, reassessing their strategies in light of the strong economic performance.
Meanwhile, the central bank’s primary mandate is to manage inflation and employment, and with the economy showing resilience, there might be less urgency to reduce rates. This could mean that the US Fed will adopt a wait-and-see approach, carefully monitoring upcoming economic data before making any significant policy shifts at the upcoming FOMC.
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