IN THIS ISSUE:

1. Zero Percent Chance Fed Will Stand Pat on July 31
2. The Case For a Fed Funds Rate Cut at the End of July
3. Why We Shouldn’t Cut Rates Now, Or At All This Year

Zero Percent Chance Fed Will Stand Pat on July 31

Let me say at the outset, I’ve never seen anything remotely like this in my almost 40 years of following the Fed. Based on Fed Funds futures (CME FedWatch), the odds of a Fed interest rate cut on July 31 have surged to 100%. This is unbelievable based on what the Fed has said since its most recent policy meeting on June 18-19.

And it’s even more unbelievable when you look at the numbers in the chart below. Almost 72% of traders believe that there will be a 25-basis point cut (0.25%). Shockingly, over 28% of traders believe the Fed Open Market Committee (FOMC) will cut its key interest rate by 50 basis points (half of 1%) on July 31! I can’t remember the last time the FOMC cut (or raised) the Fed Funds rate by 50 bps in one move.

Most importantly, the latest reading of the Fed Funds futures shows a 0% chance the FOMC leaves the rate unchanged at the end of July. I don’t recall that ever happening before! What this means is that traders of Fed Funds futures have fully bought into the media hype for a Fed rate cut ASAP. Here’s the chart:

Regular readers know that I have been skeptical about any Fed rate cuts this year, certainly not in July. Yet with Fed Funds futures signaling a 100% chance of a rate cut in July, and a nearly 60% chance of a cut in September (not shown), I have had to rethink my position. So, where am I now? I remain skeptical.

With the odds for a rate cut on July 31 at 100%, there would have to be a very compelling story to convince the Fed to go against what it has said recently and cut its key interest rate at the end of this month. If the FOMC leaves the Fed Funds rate unchanged at its July 30-31 meeting, it will be one of the greatest market misses of all time!

Of course, if there is a rate cut on July 31, it will be a big miss for Yours Truly!