Wall Street "Guessing the Intent": Cut interest rates by 50 or 25, the next 12 hours will tell?

Currently, the market's expectation for a 50 basis point rate cut by the Federal Reserve is soaring. It is worth noting that this shift in market sentiment is not due to new economic data or a change in Fed policy, but rather from media reports last week that were suspected to be "leaked information".

The Federal Reserve is currently in a "quiet period" where officials do not make public statements. Therefore, leaking information to the media has become a "tool" to guide expectations.

Jim Reid, Director of Global Economic and Thematic Research at Deutsche Bank, believes that if the Federal Reserve does not clarify through media leaks in the next 12 hours, market expectations for a 50 basis point rate cut will further increase:

"The media trends in the next 12 hours are crucial and may ultimately determine market pricing."

Media Leaks Guiding Expectations? Wall Street Interpreting Signals

Mohamed El-Erian, Chief Economic Advisor at Allianz Group, stated:

"The market's expectation for a 50 basis point rate cut by the Federal Reserve this week has intensified and has become the most likely outcome in the eyes of traders, surpassing the expectation of a 25 basis point cut...

Market sentiment was mainly influenced by reports from "informed sources" in last Friday's Wall Street Journal and Financial Times, and Federal Reserve officials did not explicitly refute this in subsequent market volatility."

According to Wall Street News, last week, "New Fed News Agency" Nick Timiraos published an article suggesting that a 25 basis point and 50 basis point rate cut is a "close call". Similarly, Colby Smith of the Financial Times also published a similar viewpoint.

These two articles were considered by Wall Street to be signals from the Federal Reserve to the market, leading to a reassessment of the rate cut magnitude, with the probability of a 50 basis point cut significantly increasing.

Furthermore, on the 15th, Greg Ip, a senior central bank reporter at the Wall Street Journal, analyzed the current economic situation and believed that the need for further rate cuts by the Federal Reserve is increasingly evident, advocating for a 50 basis point cut.

Currently, the Federal Reserve is in a "quiet period" where officials do not make public statements. Therefore, leaking information to the media has become a "tool" to guide expectations. President of research firm Bianco, James Bianco, analyzed:

Federal Reserve Chairman Powell has always strived to achieve a 12:0 vote from the Federal Open Market Committee (FOMC) in every policy decision to demonstrate the authority and credibility of the policy However, this pursuit of "perfect consensus" actually gives each member of the Federal Reserve a "veto power." For example, the most hawkish Chris Waller's speech advocating for only a 25 basis point rate cut led to a rapid shift in market expectations, with the probability of a 50 basis point rate cut dropping significantly from 60% to 20%.

To avoid continued market turmoil, it is expected that Powell will release clear signals to guide expectations through the "Fed's mouthpiece" before the final decision.

In the past four years, there have been only two dissents within the Federal Reserve, both occurring in 2022, setting a record low in over 70 years.

Deutsche Bank: Will the next 12 hours reveal the answer?

So, will the Federal Reserve cut rates by 25 or 50 basis points on Wednesday?

Deutsche Bank analyst Matt Raskin believes there are two possibilities: either the media will guide market expectations back to a 25 basis point rate hike, or the Federal Reserve will announce a 50 basis point rate hike on Wednesday.

Deutsche Bank's Global Head of Economic and Special Research, Jim Reid, emphasized that if Federal Reserve officials remain silent today and do not leak information, the likelihood of a 50 basis point rate hike on Wednesday will increase:

"The media trends in the next 12 hours are crucial and may ultimately determine market pricing."