September 18, The Federal Reserve will almost certainly cut interest rates tonight for the first time in more than four years, but it remains unclear whether policymakers will choose to cut by 50 basis points or a smaller amount. The interest rate futures market currently reflects a more than 60% chance of a 50 basis point cut. Fed Chairman Powell has said that this is their top priority as inflation approaches the Fed's 2% target. However, a 25 basis point rate cut would be more in line with the Fed's practice of starting previous easing cycles outside of a brewing crisis. Equity options pricing shows that the S&P 500 index may fluctuate by about 1.1% on Wednesday. The recent rise in US stocks makes it difficult for stocks to cope with disappointment if the Fed cuts interest rates by a smaller amount.
KPMG chief economist Diane Swonk wrote that while a 50 basis point rate cut "will undoubtedly be discussed," "Powell is unlikely to get the votes to do so." "With U.S. stocks near all-time highs and likely already pricing in a deep Fed easing cycle, the risk-reward bias for further upside looks muted," said Tara Hariharan, managing director of global macro hedge fund NWI Management.
StoneX analyst Weller said that a 25 basis point rate cut could lead to a knee-jerk rise in the dollar, and USD/JPY could return to the key 142.00 level; a 50 basis point rate cut could cause the currency pair to fall to the psychological level of 140. Glen Capelo, managing director of fixed income at Mischler Financial Group, said that a 25 basis point rate cut by the Federal Reserve is likely to lead to a sell-off in U.S. Treasuries, but much will depend on Powell's press conference.
Michael Rosen, managing partner and chief investment officer of Angeles Investments, believes that the current bond market is pricing in too aggressively the pace of the Fed's rate cuts. The market expects the Fed to cut interest rates by 250 basis points next year, a rate that is only possible in a recession. Therefore, he believes that the decline in short-term U.S. Treasury yields will be less than market expectations, and long-term yields may even rise from now on. Angel One analyst Saish Sandeep Sawant Dessai said in a report, "The real risk is that the market is pricing in too much dovishness, which could lead to higher U.S. Treasury yields and the dollar and further depress gold prices." (Jinshi)
