The Federal Reserve’s Federal Open Market Committee (FOMC) begins its two-day policy meeting today, with markets and analysts closely watching to see whether the Fed will cut interest rates by 25 or 50 basis points. The decision remains uncertain as the debate centers around slowing economic growth and a softening labor market, versus the Fed’s continued vigilance over inflation.
The Case for a Larger Cut: According to a Wall Street Journal article by Nick Timiraos, who is often referred to as the “Fed whisperer” due to his insight into the central bank’s thinking, there is seems to be a growing conseus around a 50 basis point cut.
- William English, a former senior adviser at the Fed, highlighted the argument for a larger cut. “If you are more worried now about growth and employment than inflation, then you might well want to take out a little bit of insurance,”
- Former Dallas Fed President Robert Kaplan echoed this sentiment, saying he would prefer a 50 basis point cut if he were still a voting member of the committee. Kaplan noted that Fed officials might not regret a larger cut if the economy continues to perform well into the next meeting in November. However, a smaller move of 25 basis points could lead to regrets if the labor market deteriorates more rapidly in the coming weeks.
The Case for a Smaller Cut: English, who had previously supported a smaller cut, said that if inflation remains a concern, the Fed may opt for caution. “If they’re not convinced that inflation is really as good as the recent data has suggested, they may still be worried that the battle against inflation isn’t over,” he said.
- Fed Governor Christopher Waller also weighed in earlier this month, emphasizing the importance of acting quickly if the economic data calls for it. “I was a big advocate of front-loading rate hikes when inflation accelerated in 2022, and I will be an advocate of front-loading rate cuts if that is appropriate,” Waller said following the release of the latest payroll report on September 6.
Market Sentiment and ExpectationsDespite the debate among officials, market expectations are clearly divided.
- A CNBC Fed Survey, released this morning, shows that 84% of respondents, including economists, fund managers, and strategists, expect the Fed to cut by 25 basis points. Meanwhile, 16% see a 50 basis point decrease.
- However, the CME’s FedWatch Tool suggests that markets are pricing in a 2-to-1 chance of a 50 basis point cut, reflecting growing sentiment that the Fed may opt for a more aggressive approach.
Looking Ahead: All eyes will be on the FOMC’s statement tomorrow, with markets bracing for a decision that could have significant implications for the direction of the U.S. economy in the months ahead.
