The U.S. Federal Reserve is widely expected to cut interest rates at the conclusion of its final two-day meeting this week, but uncertainty still surrounds the scope of the potential cut.
According to CME Group’s ( NASDAQ:CME ) closely watched FedWatch Tool on Monday, the odds that policymakers will cut by 50 basis points instead of a more traditional 25 basis point cut were 59% . Borrowing costs are currently at a 23-year high, from 5.25% to 5.5%.
Over the weekend, bets between a cut of 250 points and half a point were even, in a sign of the rapid shift in the debate around the cuts.
Just last week, investors, persuaded by last week’s data that showed slightly warmer-than-expected growth in producer and consumer prices in August, had placed a higher probability on a quarter-point decline. But recent media reports have suggested that the argument for a 50 basis point cut remains in play, with former New York Fed President Bill Dudley saying the case for such a cut was strong.
In a note to clients on Friday, Citi analysts said the Fed’s decision was still “close,” adding that they expected a 25 basis point cut this week, followed by two 50 basis point cuts at the central bank’s meetings in November and December.
However, Citi analysts noted that “rather weak” retail sales data on Tuesday “could prompt the Fed to cut 50 [basis points].” On a monthly basis, economists see retail sales growth contracting 0.2% in August, after expanding 1.0% in July.
Signs of weakening activity could prompt the Fed to act more aggressively to help support the economy. Officials are already weighing the lingering hold on recent inflation numbers, as well as data showing a softening in the US labor market.
Fed Chairman Jerome Powell said in August that “the time has come” to adjust monetary policy due to potential “downside risks” facing the employment picture. The outcome of a possible easing cycle could be one of Powell’s lasting legacies, especially as the Fed tries to orchestrate a so-called “soft landing” — or a cool-down in once-skyrocketing inflation that doesn’t lead to a collapse in labor demand and the broader economy. economy – after a period of increased interest rates.
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Written by D Fernando
