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Fed rate cut is coming, but some market insiders doubt it’s really necessary

Federal Reserve Board Chairman Jerome Powell reacts after the two-day meeting of the Federal Open Market Committee on interest-rate policy on June 13, 2018, when it raised its benchmark rate to 1.75% to 2%. If the Fed cuts this week, the rate will return to that level.

Yuri Gripas | Reuters

The Federal Reserve is expected to cut its benchmark lending rate at the conclusion of its Federal Open Market Committee meeting, which will take place on Tuesday and Wednesday of this week.

The market expects it, and so do chief financial officers of major corporations surveyed by CNBC. But the CFOs are late to the rate-cutting party, and they still are not entirely sure more cuts are the right monetary policy.

The Fed is expected to lower its benchmark overnight lending rate by a quarter point at this week’s FOMC meeting. Traders in the fed funds futures market were hedging some bets ahead of the Fed announcement, but market expectations for a 25-basis-point rate cut were at 63.5%, according to the CME Group’s FedWatch tool.

A majority of chief financial officers responding to the CNBC Global CFO Council third-quarter 2019 survey think the Fed will cut rates. However, CFOs believe there will be only one more rate cut by the Fed this year, and a majority of CFOs told CNBC that the current federal funds rate is “about right.”

The CNBC Global CFO Council represents some of the largest public and private companies in the world, collectively managing more than $5 trillion in market value across a wide variety of sectors. The Q3 2019 survey was conducted between Aug. 21 and Sept. 3 among 62 global members of the council, including 23 from North America.

How many rate cuts do you think there will be in 2019?

(Note on chart: Each quarter CNBC asks CFOs how many rate cuts they expect in the calendar year. A response of “one cut” indicates that CFOs do not expect another rate cut in 2019.)

The CFOs’ view that if the Fed cuts, it will be the final cut of 2019, puts the C-suite at odds with the prevailing view in the market (tracked by the CME Fedwatch tool) that the Fed will cut multiple times over the remainder of this year. But it does not necessarily put them at odds with the Fed, which may signal it is in no hurry to keep cutting rates.

Seventy percent of U.S. CFOs say the Fed will cut one more time in 2019, but one-fifth of CFOs surveyed would not even go that far, saying the cut made last quarter will be the only one this year. Less than 10% of CFOs in the U.S., as well as in the Europe and Asia-Pacific regions surveyed, believe there will be two more cuts in 2019.

More than 50% of traders expect another cut in December, and a smaller percentage (30%) forecast a cut in October.

More from the CNBC CFO Council Survey:

Lack of 2020 recession fears leads CFOs to see a Trump reelection
U.S.-China trade war will not see quick resolution
CFOs fear a Dow drop to as low as 23,000

“The drama is centered on just how strongly the Fed will signal that it’s going to cut rates again by the end of 2019,” Tom Essaye, founder of The Sevens Report, said in a note. “It’ll be the ‘dots’ and statement that determine whether the Fed meets market expectations (and spurs a short-term rally) or if we see another ‘hawkish’ cut and uptick in volatility.”

Among chief financial officers, reluctance to forecast cuts may partially be explained by the fact that they are not paid to think like short-term market traders.

Before the Fed’s second-quarter cut, which was the first since the end of the Great Recession, CFOs in the previous CNBC survey did not expect any cuts this year. In fact, not a single U.S. CFO surveyed by CNBC in Q2 2019 thought a rate cut was necessary.

Chief financial officers are more likely to play it safe than would a bond trader polled by CME.

“CFOs are certainly bigger risk takers than ever before, but when it comes to preservation of capital, they remain cautious, as they should