As of Friday afternoon, investors are pricing in a 59% chance of a 50-basis-point interest rate cut from the Federal Reserve at its September meeting next week. John Hancock Investment Management co-chief investment strategist Matt Miskin joins Market Domination to discuss the rate cut path ahead and how it may impact the broader market (^DJI,^GSPC, ^IXIC). Miskin expects the Fed to initiate a 25-basis-point rate cut and announce more cuts to come. He points to three things the Fed needs to do to secure its soft landing. The first is by cutting rates aggressively and significantly lowering the fed funds rate. Second, the labor market needs to remain calm, so initial jobless claims must stay low and the unemployment rate cannot rise. Finally, high-yield spreads must stay tight. "You have those three things over the course of a week like this, and markets love it. You saw the two-year yields fall a lot. You saw the dollar fall a lot. That's going to help actually borrowing costs. It helps foreign revenues. So that actually was pricing in a lot more of that soft landing scenario," he explains. As the Fed kicks off its rate-easing cycle, Miskin believes that the market's outlook depends on whether or not the US heads into a recession. He notes that historically, when the Fed eases rates and a recession does not occur, stocks rally. On the other hand, stocks will likely come under pressure, while bonds will stand out if there is a recession. In both scenarios, the defensive areas
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