I expect a 25 bps cut.
A 50 bps cut could send wrong signals to investors that the economy is not doing well (looming recession), destabilising the 'soft-landing effect' that FED is going for, thereby triggering a mass sell off across the board.
Afterall, inflation is still high and far from the FED's 2% goal. US economy is still growing (albeit slow), unemployment rate is high but not glaringly unacceptably high. The last FED wants is to over-cut rates and undo months of efforts to curb inflation (and risk elevating rates once more should inflation goes up again).
I believe a 25 bps cut is on the table, and FED will then employ a wait and see approach to see how things go - whether there are signs of inflation going back up or inflation is under control and heading towards their 2% goal.
The above are my opinion.
Statistics wise, the market-implied probability of a 50 basis-point cut this week rose from Friday's 50% to Monday's 57% while the odds for a 25 basis-point cut slipped from 50% to 43%, according to futures contract data tracked by CME Group's FedWatch Tool, the most widely cited proxy for investor expectations for movements from the highly influential Federal Open Market Committee. It's the first time since Aug. 13 the market has favored a 50 basis-point move, skyrocketing from just 14% odds of a jumbo cut as recently as last Wednesday.
Bearing these in mind, should FED do a 25bps cut, will it dampen market sentiments and lead to a sell off? Since it's not in line with what 'majority' would have expected? Should FED do a 50bps cut, will markets think that recession is on the horizon and a sell-off is triggered too?
Or, will we see waves of green either way? Since market loves certainty, and having the first rate cut in place gives that sense of 'certainty' that we are finally closer to our goal?
So what do yall think?
Thanks for the roller coaster ride thus far, Jerome Powell ππ
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Comments
In the meantime Iβm adding capital, buying and selling the dips in the volatility today while we wait and listen to all the Fed noise π€£ Cheers, BC π
Some of the noise:
Standard Chartered came out today and argued that an FOMC rate cut of 50-basis points may perhaps be worse than cutting rates by the smaller 25-basis points in the upcoming Wednesday FOMC meeting - SeekingAlpha
UBS said it thinks Jerome Powell and the πΊπΈ Fed will cut rates by 25 basis points this week.
Senator Elizabeth Warren - Itβs time for a big cut in interest rates by the Fed β at least 75 basis points. Chair Powell already admitted heβs waited too long. Delay puts too many jobs at risk and threatens our entire economy.
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Preferably 50 bps so thar mortgage loans are not as high, though markets may over react @SPACE ROCKET
The decision on whether to cut interest rates by 25 bps or 50 bps is a crucial one that can have a significant impact on the market and investor sentiment. Here are a few key points to consider:
Economic indicators: As you mentioned, the US economy is still growing, albeit at a slower pace, and the unemployment rate is relatively high but not excessively so. Inflation is also a factor to consider, and it is currently above the Federal Reserve's target of 2%. These factors suggest that a more cautious approach may be necessary to avoid destabilizing the economy further.
Investor expectations: Market-implied probabilities indicate that there is a higher expectation for a 50 bps cut compared to a 25 bps cut. However, it's important to note that market expectations are not always accurate predictors of the actual outcome. The Federal Reserve will consider a range of factors, including economic data and market conditions, before making a decision.
Market reaction: The market's reaction to a rate cut can vary depending on investor sentiment and expectations. If the Federal Reserve delivers a 25 bps cut when the majority expected a 50 bps cut, there could be some initial disappointment and a potential negative impact on market sentiment. Conversely, a 50 bps cut might raise concerns about the state of the economy and trigger a sell-off as investors interpret it as a sign of an impending recession.
Ultimately, it is challenging to predict with certainty how the market will react to a specific rate cut decision. The market prefers certainty, and any decision that provides a sense of stability and progress towards the Federal Reserve's goals can have a positive impact. It is crucial for investors to closely monitor market developments, economic indicators, and the Federal Reserve's communication to make well-informed investment decisions.
Please note that the above analysis is based on the information provided and should not be considered as investment advice. Investing in the financial markets carries risks, and it is essential to conduct thorough research and consider personal financial goals before making any investment decisions.