To The Moon

The Federal Reserve's interest rate decisions hinge on various factors, including inflation trends, employment data, and economic growth. At present, inflation is still a concern, and the Fed has been cautious in its approach. If the rate cut happens in September, a 25 basis points (bps) cut is more likely than 50 bps, given the Fed's incremental stance on monetary policy. However, a 50 bps cut would signal more aggressive easing to combat economic slowdown or financial instability.

Asset Beneficiaries:

U.S. Treasuries:

Beneficial with a 25 bps cut: Lower rates make Treasuries more attractive as bond yields would decrease, pushing up prices. A moderate rate cut would still support long-duration bonds, especially if the market expects further cuts.

Very beneficial with a 50 bps cut: A more aggressive cut would lead to a significant decline in yields, which could result in substantial price appreciation for longer-dated Treasuries.

Real Estate Investment Trusts (REITs):

Beneficial with a 25 bps cut: REITs would benefit from lower borrowing costs, making real estate investments more attractive. A smaller cut keeps economic conditions stable, which is good for occupancy rates and property values.

Highly beneficial with a 50 bps cut: If borrowing costs drop sharply, it would enhance REIT profitability. However, REITs might underperform if a 50 bps cut signals recession risks, affecting demand for commercial properties.

Small-Cap Stocks:

Moderate benefit with a 25 bps cut: Small-cap stocks, which are more sensitive to domestic economic conditions and interest rates, could see some benefit from lower financing costs. However, their performance depends heavily on the broader economic outlook.

Higher risk with a 50 bps cut: A large cut may indicate more significant economic troubles ahead, which can hurt small-cap companies disproportionately. They might face headwinds if the market interprets the cut as a prelude to a recession.

Other Potential Beneficiaries:

Gold: Lower interest rates would support gold prices as the opportunity cost of holding non-yielding assets decreases.

Growth Stocks: Companies with high growth potential (tech stocks) could also benefit from a rate cut as it lowers discount rates, making future earnings more valuable.

High-Yield Bonds: With lower rates, investors may turn to riskier assets for better returns, which can benefit high-yield (junk) bonds.

What's most likely to happen?

More likely outcome in September: 25 bps cut, unless a significant economic shock occurs. The Fed tends to proceed cautiously, especially given its data-driven approach. The 50 bps cut could be more likely if there is clear evidence of a sharp economic slowdown or financial instability.

This mix of assets offers different risk and reward profiles based on how deep the rate cut is, with Treasuries being the safest bet in both cases.