The WSJ Timiraos is out with an analysis of the upcoming Fed rate decision. The title of the article says it all with the author calling the decision a dilemma. That is does the Fed go big or small (or by 25 basis points or 50 basis points).
Some of the highlights;
- Fed set to cut rates at its Sept. 17-18 meeting, first cut since 2020.
- Decision on whether to cut by 0.25 or 0.5 percentage points is closely contested.
- Powell’s recent speech emphasized monitoring job market risks and adapting rate cuts accordingly.
- Some analysts lean towards a smaller cut due to firm housing costs in recent CPI data.
- Economic data mixed: weaker June/July hiring, improved August payroll growth, low layoffs.
- Projections at the upcoming meeting (dot plot) will indicate the number of rate cuts expected this year.
- A smaller cut (0.25 points) is seen as the “path of least resistance,” avoiding market panic.
- A larger cut (0.5 points) could act as insurance against economic slowdown risks.
- The decision reflects Fed’s strategy to balance inflation risks against potential labor market weakening.
- Analysts suggest the Fed could adjust future cuts based on incoming economic data and conditions.
US stocks are seeing more buying as traders had pretty much taken 50 off the table.
A 50 basis point rate cut by the Fed could spark market unease, as it may suggest the economy is weaker than expected. However, the Fed could justify the extra 25 basis points by citing the need to address inflation and the lagged impact of monetary policy.
The dot plot and central tendencies for GDP, inflation, and employment will be closely watched as well.
Regardless of the Fed’s decision (25 or 50 basis points), the uncertainty surrounding that dilemma, as well as the economic outlook will likely lead to increased market volatility.
The Fed Chair will likely use the quiet period and two-day meeting to carefully craft their comments, given the complexities and uncertainties involved
CLICK HERE (article may be behind a paywall)