Wall Street Bets on a Big Fed Rate Cut, but Doubts Linger
BEIJING, Sept. 17, 2024 -Wall Street investors are increasingly confident that the Federal Reserve will deliver a hefty 50 basis point interest rate cut this week, with the probability exceeding 60%, according to a report in the Financial Times.
The shift in sentiment comes after a flurry of economic data suggesting that inflation is cooling and the labor market isweakening. The Consumer Price Index (CPI) rose 2.5% year-on-year in August, the smallest increase since February 2021, signaling a continued slowdown in inflation. Meanwhile, the Labor Department reported thatlayoffs surged to 1.76 million in July, the highest level since March 2023, indicating a softening labor market.
The market has shifted towards a 50 basis point cut since [September]13th, but we think the Fed will cut by 25 basis points, said Subadra Rajappa, head of U.S. rates strategy at Societe Generale.
The Fed’s monetary policy meeting is scheduled for September 17-18. Fed Chair Jerome Powell had hinted at arate cut in late August, stating that the time for a reduction was upon us.
While the expectation for a 50 basis point cut is gaining traction, some market participants remain cautious.
While there is a close call between the two views, I think the Fed will cut by 50basis points, said Andy Brenner, head of international fixed income at NatAlliance.
JPMorgan Chase analysts also predicted a 50 basis point cut this week.
The Fed has been on an aggressive rate-hiking path since March 2022, raising rates by a total of 525 basis pointsin 11 consecutive meetings. The central bank has maintained the federal funds rate target range at 5.25% to 5.5%, the highest level in 23 years, for the past year.
The potential for a significant rate cut reflects the Fed’s efforts to navigate a delicate balancing act betweencurbing inflation and supporting economic growth. The central bank is facing pressure to ease monetary policy to stimulate the economy, but also needs to ensure that inflation remains under control.
The outcome of the Fed’s meeting will have significant implications for global financial markets. A larger-than-expected rate cut could boost risk appetite andfuel further gains in stock markets, while a smaller cut or a surprise pause could trigger volatility.
The news of the potential 50 basis point cut has sparked debate among economists and investors. Some argue that a more aggressive rate cut is necessary to stimulate economic growth and prevent a recession. Others believe that a more gradual approachis warranted to avoid reigniting inflationary pressures.
The Fed’s decision will be closely watched by market participants around the world, as it will provide insights into the central bank’s outlook for the U.S. economy and its commitment to fighting inflation.
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