What if the Fed Doesn’t Cut Interest Rates This Week?

The capital markets are widely expecting the Federal Reserve to implement another rate cut this week with algorithmic models like the CME Group’s FedWatch tool forecasting a 65.8% chance of a cut. However, there are rumblings and increased expectations that the Fed won’t cut rates.

According to a CNBC report, rising energy prices sparked by an attack on Saudi Arabia oil facilities over the weekend could add to the central bank second guessing another rate cut after a 25-basis point slice during its last meeting.

Brent crude jumped to its highest level in four months to start the week as a result of growing tensions in the Middle East, which could cause a supply disruption globally. U.S. President Donald Trump tweeted that he would tap into emergency reserves if necessary.

“While the push-through of inflation from oil prices to core prices is small, the jump in overall prices, in combination with signs that core inflation is already heating up, may make it more difficult for the Fed to cut rates further,” said Beth Ann Bovino, U.S. chief economist at S&P Global Ratings. “They had a cushion to fall back on with lower inflation — they could cut rates given inflation was low. Has the cushion been removed?”

Still Forecasting a Cut

Furthermore, per the report, while the majority of the markets “still see the central bank lowering its benchmark overnight lending rate by a quarter point at this week’s Federal Open Market Committee meeting, the case for continued cuts seemingly has gotten weaker. Traders in the fed funds futures market on Monday were pricing in a 34% chance that the Fed will stay put on rates; the probability was zero a month ago and just 5.4% a week ago, according to the CME.”

A data-fueled Fed could also look at the overall health of the economy and give the markets a head fake on a rate cut. Recent data shows that consumer and business confidence is higher—something that could feed into the Fed’s psyche when positing interest rate policy.

Nonetheless, some analysts still foresee a cut on the horizon.

“I can’t think of another time recently that the Fed had this much of an about-face within a month or a few weeks of their meeting date,” said Jim Paulsen, chief investment strategist at the Leuthold Group. “I still think they do 25 [basis points], but the case is weak.”

“You could make a very cogent argument that ‘we’re kind of done now,’” Paulsen added. “Most of the time a lot of the drama is taken out of this. But I think there might be quite a lot of drama in that press conference.”

Relative Value ETF Plays

Interest rate movements could affect how equities will react this week, which make relative value exchange-traded funds in the U.S. a possible play. For investors looking for continued upside in U.S. equities over international equities, the Direxion FTSE Russell US Over International ETF (NYSEArca: RWUI) offers them the ability to benefit not only from domestic U.S. markets potentially performing well, but from their outperformance compared to international markets.

Conversely, if investors believe that international markets will outperform U.S. domestic markets, the Direxion FTSE International Over US ETF (NYSEArca: RWIU) provides a means to not only see international markets perform well, but a way to capitalize on their outperformance compared to the U.S. markets.

For more market trends, visit ETF Trends.