As the U.S. Federal Reserve prepares for its upcoming Federal Open Market Committee (FOMC) meeting on September 18, markets are pricing in a 25-basis-point rate cut.
However, economists warn that this expected adjustment could lead to a "sell-the-news" phenomenon for risk assets.
Recent data from the CME FedWatch tool shows a 57% probability of a 25-basis-point cut, while the likelihood of a 50-basis-point reduction has surged from 13% to 43% in just 24 hours.
This shift suggests growing uncertainty about the Federal Reserve's direction amid economic signals.
Steve Hanke, an economist at Johns Hopkins University, indicated that the 25-basis-point cut is largely anticipated by investors. "A 25-basis-point cut is already factored into the market, which means the actual cut might underwhelm," Hanke said.
He noted that a more significant cut, such as 50 basis points, could provide a positive market response, as it has not been fully considered in current pricing.
Former New York Federal Reserve President Bill Dudley also expressed support for a 50-basis-point cut, arguing that current interest rates are 150-200 basis points above the neutral rate for the U.S. economy.
He questioned the rationale for delaying action, stating, "Why not just get started?"
Leena ElDeeb, a research analyst at 21Shares, commented that a 50-basis-point cut could be a significant market event, yet it might also raise concerns regarding recessionary trends. "A more aggressive rate cut could shock the markets, indicating the Fed's response to economic weakness," ElDeeb noted.
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