Investors Confident in Federal Reserve Interest Rate Cut in September

Investors are eagerly anticipating a potential interest rate cut by the Federal Reserve at the end of its September meeting, with markets currently pricing in a 100% chance of a rate cut, up from 70% just a month ago. This increased confidence is fueled by a better-than-expected June inflation reading and signs of cooling in the labor market, leading economists and investors to believe that the Fed will soon begin cutting rates as inflation approaches the central bank’s target.

Deutsche Bank chief US economist Matthew Luzzetti noted that recent data showing softening in the labor market and cooling inflation pressures, particularly in the shelter category, will likely impact the outlook for monetary policy. Federal Reserve Chair Jerome Powell also expressed confidence in falling inflation levels, but declined to specify when exactly the Fed will cut rates, emphasizing that decisions will be made on a meeting-by-meeting basis.

Despite the uncertainty surrounding the timing of the rate cut, investors are confident that lower interest rates are on the horizon. This confidence has sparked a broad stock market rally, with investors rotating out of tech stocks that have dominated the market in recent years and into interest rate-sensitive sectors like Real Estate and Industrials, which have seen significant gains in the past five days.

The small-cap Russell 2000 index has also surged, breaching its 2022 high for the first time in the current bull market. Ritholtz Wealth Management chief market strategist Callie Cox believes that if the prospect of a rate cut remains in play for the fall, the bull market could finally wake up, bringing good news for all investors.