The Federal Open Market Committee is likely to reduce its policy rate by 25 basis points to a range between 3.75% and 4% at its next meeting on Oct. 29.
That policy step is not without risks.
First, the FOMC is cutting rates directly into financial markets that look frothy at best and setting up for a correction at worst.
Our RSM US Financial Conditions Index implies that conditions are mildly accommodative in contrast with a modestly restrictive stance that Federal Reserve Chairman Jerome Powell uses to describe current policy conditions.
Our index indicates that financial conditions in the United States stand at 0.65 standard deviations above neutral, which is not well aligned with recent central bank rhetoric.
Any cuts by the central bank point toward the risk of lower rates, greater liquidity and more leverage stoking a greater financial bubble.
Second, we think that inflation, driven by sticky and stubborn service sector demand, is likely to remain above 3% and will most likely increase as tariffs reset higher.
We anticipate that inflation, in both the headline and core September consumer price index, will arrive at 3.1% when it is published on Friday.
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