How much is the appropriate rate cut for the Fed in September? Analysts: A significant reduction may scare investors
Federal Reserve Chairman Powell has indicated an upcoming rate cut, but the extent is still uncertain. Analysts point out that a significant rate cut may scare off investors. According to the CME FedWatch tool, the probability of a 25 basis point rate cut is 65.5%, while a 50 basis point cut is 34.5%. Experts believe that a steady rate cut strategy is conducive to boosting confidence, while a significant rate cut may be seen as an acknowledgment of economic slowdown, thereby exacerbating market concerns
According to the financial news app Zhitong Finance, last week, Federal Reserve Chairman Powell clarified the central bank's intentions, stating that "it is time" to start cutting interest rates. This statement has led many investors to speculate that the Fed may begin a rate-cutting cycle in September, but there is still uncertainty about the specific size of the first rate cut—will it be 25 basis points or 50 basis points?
Perhaps a larger rate cut is not necessarily the best choice.
According to data from the FedWatch tool of the Chicago Mercantile Exchange, the probability of a 25 basis point rate cut in September is 65.5%, while the probability of a 50 basis point rate cut is 34.5%.
A significant rate cut would make funds more freely available, thereby boosting the economy. However, this may also make investors uneasy, as they may interpret it as a signal that the Fed is acknowledging the need to boost the economy.
José Torres, Senior Economist at Interactive Brokers, said, "If you are currently bullish on the market, you do not want to see a 50 basis point rate cut. You want the Fed to gradually and slowly ease monetary policy, rather than take sudden drastic actions."
Torres pointed out that a significant rate cut by the Fed could send a signal to investors that the Fed is slow to act on rate cuts and needs to take swift measures to address economic slowdown. In contrast, a more moderate and predictable rate cut strategy may enhance investor confidence.
Dave Sekera, Chief Market Strategist at Morningstar, believes that the Fed will cut rates by 25 basis points in September. He thinks that a 50 basis point rate cut is not only unlikely but could also have negative consequences.
In a report, Sekera wrote, "If they cut rates by 50 basis points, the market may interpret it as the Fed being more concerned about the economy than we expected. This could exacerbate market concerns about an imminent economic recession."
After observing the market's reaction to the July unemployment data, investors may be prepared to sell if they see any signs of economic slowdown. Sekera said, "If they really cut by 50 basis points, all of this could lead to a market decline."