The Wall Street Journal published an article by Timiraos analyzing the upcoming Fed rate decision. The title of the article says it all, as the author describes the decision as a dilemma. Should the Fed make a big or small decision (or 25 basis points or 50 basis points).
Some highlights;
- The Federal Reserve is set to cut interest rates at its September 17-18 meeting, the first cut since 2020.
- The decision on whether to cut by 0.25 or 0.5 percentage points is hotly contested.
- In his recent speech, Powell stressed monitoring labor market risks and adjusting interest rate cuts accordingly.
- Some analysts are leaning towards a lower cut due to higher housing costs in recent CPI data.
- Economic data is mixed: weak hiring in June and July, improved payroll growth in August, and lower layoffs.
- The forecasts at the next meeting (dot chart) will indicate the number of interest rate cuts expected this year.
- A smaller cut (0.25 points) is seen as a “path of least resistance,” avoiding market panic.
- A larger cut (0.5 points) would act as insurance against the risk of an economic slowdown.
- The decision reflects the Fed’s strategy of balancing inflation risks with potential labor market weakness.
- Analysts suggest that the Fed may adjust future cuts based on incoming economic data and conditions.
US stocks are seeing more buying as traders pulled nearly 50 stocks from trading.
A 50 basis point rate cut by the Fed could unsettle markets, as it could signal that the economy is weaker than expected. However, the Fed could justify an additional 25 basis point cut by citing the need to address inflation and the lagging effect of monetary policy.
We will also be closely monitoring the dot plot and central trends for GDP, inflation and employment.
Regardless of the Fed’s decision (25 or 50 basis points), the uncertainty surrounding this dilemma, as well as the economic outlook, is likely to lead to increased market volatility.
The Fed chairman is likely to use the quiet period and the two-day meeting to carefully craft his comments, given the complexities and uncertainty involved.
Click here (Article may be behind a firewall)