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The market is now pricing in a greater likelihood of an interest-rate cut than a hike


Investors growing concerned the economy might be too soft

In the wake of the disturbingly weak retail sales report, investors are now pricing in a small chance of a Federal Reserve interest-rate cut by the end of the year.

Investors see a 13% chance of an interest rate cut and only a 1% chance of a rate hike by the end of the year, according to the CME Group's FedWatch toolthat derives probabilities from the futures market.

"It's not a huge expectation. It's more neutral than anything," said Scott Brown, chief economist at Raymond James.

But the "narrative" that the consumer would power the economy this year given the strong labor market and rising wages is now sounding somewhat pollyannaish, he added.

In January, the Fed indicated it saw no greater possibility its next move would be a hike than a cut.

This stance "was prescient and puts the Fed in a strong position to pivot if this one-month stumble proves to have legs in the first quarter," said Chris Low, chief economist at FTN Financial.

"The data is sufficiently weak that it will no doubt fire-up the fear-of-recession anxieties that have percolated so many times this cycle," said Ward McCarthy, chief financial economist at Jefferies.


This could influence Fed officials in making decisions about the appropriate size of the balance sheet, he added.

Fed Governor Lael Brainard said she is in favor of ending the program of slowly shrinking the balance sheet later this year. That's a lot sooner than most Fed officials have indicated previously.

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