Markets want a rate cut but the Fed faces a tough choice, says a chief investment officer
Cracks are forming in an otherwise resilient economy, and the Federal Reserve could soon face a no-win choice.
“The market wants to see a rate cut in September,” Brent Schutte, chief investment officer at Northwestern Mutual, said on Yahoo Finance’s Opening Bid.
Although the Fed is widely expected to leave rates unchanged at its July 30 meeting, Schutte says the bigger question is whether policymakers will pivot toward easing later this year. Market has currently assign a rough 58% probability to a September rate cut, making it a near “coin toss.”
Despite the uncertainty, retail investors continue to pour money into equities, fueling market gains. Schutte points to an “insatiable appetite” among this group, which could help cushion markets even if Fed signals disappoint.
If expectations for a cut keep building, markets will likely rally. But if the Fed leans away from easing, a modest pullback could follow.
According to Schutte, the Fed, like markets, remains uncertain about the economic outlook and appears increasingly divided, Schutte said. Some members, like Governor Christopher Waller, have floated the idea of voting for a rate cut even sooner.. While dissenting voices alone aren't decisive, they reflect broader indecision at the central bank.
One key wild card is the new tariff deal announced by President Trump, which slapped a 25% tariff on imports from India. Schutte says the market has mostly shrugged off the latest tariff threats, assuming the White House might reverse course if necessary. But he warns that could be a risky bet, especially if businesses start passing tariff costs onto consumers.
Underlying economic data already points to weakness. Companies like Procter & Gamble (PG), Starbucks (SBUX) have flagged softening demand. Kraft Heinz (KHC) has emerged a winner, posting robust quarterly earnings fueled by inflation-weary consumers opting to cook more at home.
Even so, real private domestic purchases have slowed sharply, even before the full impact of tariffs. “You are seeing a consumer that is beginning to weaken,” Schutte said. If companies hike prices, the Fed may soon face a tough choice between rising inflation and slowing growth.
Meanwhile, Morgan Stanley maintained its baseline view that the Fed will not cut interest rates in 2025. However, in a new report, the firm outlined growing downside risks that could push policymakers to act sooner, even as early as September.
The report highlights five scenarios that could justify such a move, including a sharp drop in private payrolls, unemployment above 4.5%, continued disinflation in services, weak inflation alongside rising joblessness, or early signs of corporate stress like weak earnings and layoffs.
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