August 1 (Reuters) – As the prospect of U.S. interest rate cuts approaches, investors are evaluating whether the Federal Reserve can achieve a ‘soft landing’—a scenario in which monetary policy adjustments lead to lower inflation without significantly impacting economic growth.
On Wednesday, Federal Reserve Chairman Jerome Powell expressed increased confidence that the central bank might lower rates in September, contingent upon continued cooling of inflation. This statement is viewed as a significant indication that the Fed may soon implement monetary easing.
However, this potential rate cut does not eliminate uncertainty for investors. Some market analysts are concerned that the Fed’s prolonged period of high rates could undermine the likelihood of a successful soft landing, which aims to balance inflation reduction with sustainable economic growth.
Conversely, there are concerns that reducing rates while the economy remains relatively strong could trigger renewed inflation, potentially constraining the extent of future rate cuts.
“There are reasons to believe a soft landing remains achievable, but there are risks on both sides,” noted George Catrambone, head of fixed income and trading at DWS. “Soft landings don’t occur by delaying action.”
As of late Wednesday, futures associated with the Fed’s policy rate indicated an 87% probability of a 25-basis-point cut in September. U.S. stocks maintained earlier gains, with the S&P 500 closing up 1.6%.
Treasury yields also reflected shifting expectations, with two-year yields falling to 4.278%, their lowest in nearly six months, and 10-year yields dropping to 4.1%.
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