Chart of the week

Firming inflation data muddies the Fed’s path forward

Are investors’ rate cut expectations too high? This week’s chart explains what’s pulling the markets and the Fed in different directions, which could stoke volatility.

September 13, 2019 | 1 minute read
  • 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.

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

The chart of the week and any accompanying data is for informational purposes only and shall not be considered an investment recommendation or promotion of FS Investments or any FS Investments fund. The chart of the week is subject to change at any time based on market or other conditions, and FS Investments and FS Investment Solutions, LLC disclaim any responsibility to update such market commentary. The chart of the week should not be relied on as investment advice, and because investment decisions for the FS Investments funds are based on numerous factors, may not be relied on as an indication of the investment intent of any FS Investments fund. None of FS Investments, its funds, FS Investment Solutions, LLC or their respective affiliates can be held responsible for any direct or incidental loss incurred as a result of any reliance on the chart of the week or other opinions expressed therein. Any discussion of past performance should not be used as an indicator of future results.

This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the author and do not necessarily reflect the views, opinions or positions of FS Investments. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.

Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.

All investing is subject to risk, including the possible loss of the money you invest.

Search our site