The Fed faces a tough choice this time: Should it make a drastic 50 basis point rate cut next week, or be more conservative and start with a 25 basis point cut? 🤔 With futures markets increasingly leaning toward a moderate Fed, most people are speculating that Thursday's meeting may favor a smaller rate cut.
This would be the first rate cut by the Fed in more than four years, especially after it began keeping rates at a historic high of 5.25%-5.5% last July. And don't forget, it will be only seven weeks before the US presidential election! ⏳
There is a consensus within the Fed on rate cuts, as everyone feels that inflation is slowing and that continuing to maintain high rates could cause unnecessary harm to the economy. 💼The question is: How fast and how hard can rates be cut to avoid hitting economic growth?
A 50 basis point rate cut would return borrowing costs to normal levels more quickly, reduce the dampening of the economy, and protect the job market. Krishna Guha, vice chairman of Evercore ISI, believes that this would also reduce the risk of a hard landing. 😌
However, former Fed Vice Chairman Donald Kohn reminds us that even if the Fed chooses to take its time, they have the ability to adjust policy. Just as when inflation exceeds expectations in 2022, the Fed can adjust the pace of rate cuts to compensate for the delay. 📊
Of course, a 50 basis point rate cut is not without risks. 📉Recent data has been a bit mixed, with the employment report showing slower growth and inflation data showing easing price pressures. If the Fed cuts so much, the market may worry: Are they uneasy about the economic outlook?
Moreover, a rate cut that large may cause financial markets to over-interpret it, and the Fed must be careful to deal with these chain reactions. 🤯
In any case, the Fed's big drama is about to begin, and we will soon see their choices!