We do not expect the rate cut to rise

Rising energy prices on Monday helped to make the Federal Reserve believe that it may not have been in such a hurry to reduce its interest rates.

While markets still see the central bank lower its quarter-point benchmark lending rate at this week's meeting of the Federal Open Market Committee, arguments for further cuts are apparently weakened. Traders on the futures market of federal funds on Monday counted on a 34% probability that the Fed will maintain its rates; the probability was zero a month ago and just 5.4% a week ago, according to the CME.

This is due to changing economic trends as well as inflationary pressures caused by a 14% rise in oil prices. Rising inflation is pushing the Fed to tighten its policy or at least stay the course rather than reduce rates.

"While inflation passes oil prices at underlying prices is low, the jump in global prices, combined with signs indicating that underlying inflation is already warming, could make it harder to reduce rates by the Fed, "said Beth Ann Bovino, chief US economist at S & P Global Ratings. "They had room for maneuver with lower inflation – they could reduce rates if inflation was low." Was the safety margin removed?

Stronger economic data recently, highlighting increased consumer and business confidence, as well as retail sales, contributed to fuel some of the dovish sentiment. Some signs of easing signs of easing tensions in the tariff battle between the United States and China have also contributed.

And the tilt-up trend of inflation, such as the 2.4% annual rise in consumer prices and the likely increase in oil prices round out the picture in which Fed Chairman Jerome Powell, could at least reiterate his position that it is a "mid-cycle adjustment" and is not part of a longer detente trend.

"I can not think of another time recently that the Fed had such a reversal a month or weeks after the date of its meeting," said Jim Paulsen, chief investment strategist of the Leuthold Group. "I still think that they're 25 [basis points]but the case is weak. "

Economic data has always been better than expected since early June, allowing the Citi Economic Surprise Index to reach its highest level since February. Mr Paulsen said that the developments would present a challenge to Powell when he will hold his press conferences after the meeting and must justify the Fed's tightening deal with an improvement in the situation. economy and stock indexes close to their records.

"You can argue very convincingly that" we have sort of finished now, "said Paulsen." Most of the time, the drama is taken into account. But I think there could be a lot of drama at this press conference. "

Powell has developed a story to say things that the market does not want to hear.

In October 2018, he caused a selloff when he said, after a series of rate hikes, that the Fed was "far" from what it considers to be a neutral rate, stating that D & # 39; Other increases were in progress. He also shook investors in December by saying that the Fed's downsizing program, which was helping to tighten financial conditions, was in "autopilot" mode.

And the market is again sold when Powell, in July, announced that this rate cut was part of the mid-cycle adjustment. although it does not seem so unbalanced now.

"It looks brighter day by day," Paulsen said.

Markets will closely follow Powell's remarks, but also the Fed's statement and the way central bankers measure soaring oil prices among all other economic trends.

"Powell put his foot in his mouth at post-meeting press conferences, can he suggest that this mid-cyle cut is coming to an end?" said Michael Arone, chief investment strategist for State Street Global Advisors.

The market and the Fed have actually moved closer in recent days in terms of the long-term rate outlook. The two sides, however, remain fairly far apart, as the Fed finally sees the rate cuts come to an end and the funds rate rise, while the market still expects about three more rate cuts before the end of the cycle, in the middle of 2021.

This dichotomy has kept an element of volatility in the markets as conditions develop.

Arone sees the US-China dispute as the key to the future.

"The market is planning a large number of cuts in the coming quarters, which the Fed may be ready to suggest at this point," he said. "Investors have concluded that without the US-China trade dispute, it is unlikely that the Fed will reduce rates at this stage."