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Recent economic indicators showing hotter-than-expected consumer and wholesale prices have led to speculation about the Federal Reserve’s potential actions at its upcoming meeting. While some investors considered the possibility of a larger interest rate cut, financial analysts warn that a bigger-than-expected reduction could unsettle the stock market.
As of Thursday, market sentiment shifted significantly, with the probability of the Fed lowering rates by 50 basis points dropping to 15%, down from 44% the previous week, according to the CME FedWatch Tool. The majority of investors now anticipate a more conservative 25 basis point cut.
Eric Wallerstein, Chief Markets Strategist at Yardeni Research, stated, “For everyone who’s asking for a 50 basis point cut, I think they should really reconsider the amount of volatility that would cause in short-term funding markets. It’s just not something the Fed wants to risk.”
Economists highlight that a modest rate cut would better reflect the current economic conditions without signaling undue concern. Jennifer Lee, Senior Economist at BMO Capital Markets, commented, “A 50 basis point cut would reek of panic, and it’s almost like we’re totally behind the curve at this point.”
Historical data supports the cautious approach. Nicholas Colas, co-founder of DataTrek, analyzed past rate-cutting cycles since 1990 and noted that in instances where the Fed began with a 50 basis point cut—in 2001 and 2007—a recession soon followed. “Chair Powell and the rest of the FOMC certainly know this history. Their first cut will almost certainly be 25 basis points,” Colas remarked.
The recent Consumer Price Index (CPI) report showed core prices rising by 0.3% in August, slightly above expectations. Michael Pearce, Deputy Chief U.S. Economist at Oxford Economics, said, “The unwelcome news on inflation will distract slightly from the Fed’s renewed focus on the labor market and makes it more likely that officials stick with a more measured approach to easing, beginning with a 25 [basis point] cut next week.”
Market participants are closely watching the upcoming Federal Reserve meeting on [Insert Date], where more insights will be provided through the Summary of Economic Projections and the “dot plot,” outlining policymakers’ expectations for future interest rates.
Eric Wallerstein added, “If those rate cuts get priced out because growth is stronger than expected and GDP comes in strong for the third quarter and the labor market indicators aren’t too bad, and we keep seeing consumer spending increasing, then stocks will have more room to run as earnings continue to grow.”
