The Most Disappointing Rate Cut Ever

Interest Rate Balloon

Fed Chair Jerome Powell floated a rate cut on Friday. Markets and President Trump have been long waiting for that message.

But the market's reaction especially in the Fed Funds Futures pit was frankly strange.

Fed Funds Rates are trading daily and shown by CME which is an easy way to see where the market stands on what it expects from the Fed.

So even though Powell said enough on Friday for markets to expect a cut at the next meeting, and even though markets priced-in a higher chance for a cut for September, markets also repriced from expecting three cuts this year to two.

Not strange?

Head scratcher? Why should markets expect fewer cuts when Powell FINALLY agreed to cut.

I have an answer.

With the last CPI and PPI prints percolating and soon reported CPI to be affected by post-August 1st higher tariffs, there's risk for inflation reports to start moving up.

Powell blinked to political pressure but markets went from liking what Powell was doing (going up even though he didn't want to cut) to not liking what he was doing (bending to cut pressure).

The markets basically said this cut can cause inflation risk in the future so the markets pared back it's future amount of cuts for this year.

Very strange turn of events.

One key pillar to markets over time is if markets have confidence in the Fed and their moves or not. This slight tweak of three-goes-to-two cuts on the CME tells me that the market lost confidence a bit in the Fed's next move.

I have much more to say on this but I'll leave it there for now.

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