Former Fed "Big Three" Changes Tune: Reasons for Next Week's 50 Basis Point Rate Cut Are Sufficient

Former New York Fed President William Dudley said that there is a possibility of a 50 basis point rate cut at the upcoming Fed meeting.

Dudley made the remarks at a forum organized by The Bretton Woods Committee in Singapore on Friday, stating, "I think the rationale for a 50 basis point cut is very compelling. I know what I'm doing."

Dudley, who served as New York Fed President until 2018, is currently a columnist for Bloomberg and the Chairman of The Bretton Woods Committee. Citing a slowdown in the U.S. labor market, the former Fed member called for a 50 basis point rate cut. He emphasized the risks facing the U.S. job market are greater than the ongoing challenges of inflation.

He also highlighted Fed Chairman Powell's speech at Jackson Hole last month, emphasizing the desire to avoid further weakness in the job market. Dudley's comments come as data released earlier this week showed a surprise increase in core inflation in August, reinforcing expectations of a 25 basis point rate cut next week. He had previously stated that he expected a 25 basis point rate cut in September. "The question is, why not start right away?" he said. "It basically depends on Chairman Powell, to see how much support he has for more aggressive policies."

There are other dissenters to the expectation of a 25 basis point rate cut. Wall Street banks including Citigroup, JPMorgan Chase, and Wells Fargo anticipate the Fed taking more aggressive measures.

Market and economic analysts still have diverging views on the direction of U.S. monetary policy this year. Current swap data reflects an expectation of a rate cut of over 100 basis points this year, as the market increasingly anticipates the possibility of the U.S. economy entering a recession and needing more support. Earlier this month, Fed Governor Brainard stated that he maintains an "open mind" about further rate cuts and will support them when appropriate.

Dudley said, "It's very unusual to enter a meeting with this level of uncertainty, usually the Fed doesn't like to surprise the market."

As investors assess the possibility of a 50 basis point rate cut by the Fed next week, U.S. Treasury prices rose, driven by short-term bonds. On Friday, the yield on the 2-year U.S. Treasury fell 5 basis points in the Asian market to 3.59%, while the 10-year Treasury yield dropped 3 basis points to 3.65%. As a result, the U.S. dollar weakened, providing a boost to other major currencies.

The market expects the Fed to announce its first rate cut in over four years after the conclusion of next week's meeting. However, there is a division among traders on whether the Fed will cut rates by 25 basis points or 50 basis points, with a growing inclination towards the latter. Fed officials are currently in a "quiet period" ahead of the policy meeting.

Prashant Newnaha, Senior Asia-Pacific Interest Rate Strategist at TD Securities in Singapore, stated, "The market is once again speculating that the Fed may cut rates by 50 basis points at next week's meeting, driving buying interest in U.S. Treasuries. The Fed may cut rates by 50 basis points, as the federal funds rate is far above the bank's estimated neutral level Overnight index swap pricing shows a 33% chance of a 50 basis point cut in the federal funds rate. Newnaha stated, "If the Fed cuts rates by 50 basis points, the market is unlikely to see it as a one-off, with the market expecting the Fed to cut rates by another 50 basis points." He also mentioned that in this scenario, "yields are expected to plummet significantly."