ETF Investors Brace for a Fed Pause...in September

Market watchers are already looking past Wednesday's Federal Reserve Board meeting, keeping their eyes trained on what might happen when the board's Open Markets Committee gathers in September and December,

Critics of the Fed’s refusal to cut interest rates, which are hovering between 5.25% and 5.5%, argue that the economy is strong enough to handle its first rate cut since March 2020. But some critics are more patient than others.

“Any reasonable person would cut rates now, but the Fed is fundamentally flawed and overly rigid in their framework,” said Jay Hatfield, chief executive of Infrastructure Capital Advisors in New York. “They’ll definitely cut rates in September and maybe one more time before the end of the year,” he added.

Investors are already behaving as if a September rate cut is a given, said Jeffrey Sherman, deputy chief investment officer at DoubleLine Capital in Santa Monica, Calif.

“Two cuts this year feels right; and they may signal something this week, but they’re not moving” rates this week, he said. “I think September is in play, but it’s already priced into the market. Then, they’ll probably delay and give you the December cut.”

A September Interest Rate Pause?

Sam Stovall, chief investment strategist at CFRA in New York, counters that view, suggesting the most recent inflation data gives the Fed enough justification to pause both this week and in September.

“There’s not a lot of evidence that the economy needs a reduction in rates right now,” he said. “If higher rates are not raising the risk of a recession, I think the Fed would err to the side of being slower to lower.”

In terms of what to watch from the Fed on Wednesday, Stovall said the catalyst that could rattle markets is if the Fed “sounds less dovish than people expect.”

Richard Ratner, senior vice president and investment advisor at Bel Air Investment Advisors in Los Angeles, said investors are getting ahead of themselves if they think “one quarter of good inflation data” is enough to justify a rate cut.

“The markets would be really surprised if that happened,” he added. “Right now, the markets are pricing in a 4% chance for a rate cut, which means a July cut is extremely unlikely.”

Meanwhile, Hatfield of Infrastructure Capital Advisors, said the bond markets are doing some of the work for the Fed.

“Long term rates have come down,” he said. “The 10-year Treasury is the only thing that matters and it’s down from its peak.”

The lower yield on the closely-watched 10-year Treasury, Hatfield explained, is a positive sign for home and auto sales, which are major drivers of economic activity.