• The market continues to anticipate the Fed will act aggressively in the remainder of this year and even into next. Investors currently expect two more rate cuts in 2019 and nearly four cuts before December 2020, bringing the target Fed funds rate to approximately just 1.20% by December 2020.1
  • Rate cut expectations have already climbed this month from their lows in August, when markets were whipsawed by falling interest rates and rising trade and policy uncertainty.
  • However, the past several years Fed policy has been held captive to a tug-of-war between trade uncertainty, investor expectations, politics and economic data.
  • The Fed’s balancing act may have grown a little harder this week, though, as new data shows core inflation firmed more than expected in August, stocks approached new all-time highs and trade tensions between the U.S. and China abated.
  • Markets were clearly not convinced by Fed Chair Powell’s insistence after the July rate cut that it represented only a “midcycle adjustment,” and sank in response. As markets have shown on several occasions through the past 18 months, policy changes, or broader policy uncertainty, can create significant spikes in volatility. Given the market’s expectations that policymakers will remain aggressive in the months ahead, investors have reason to anticipate additional volatility.

1 Bloomberg Finance, L.P., as of September 13, 2019.


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