Market expects a 50 basis point rate cut is not enough! U.S. lawmakers jointly wrote to Powell urging a 75 basis point rate cut

The financial markets' expectations for a 50 basis point rate cut by the Federal Reserve this week have been rising, but U.S. lawmakers are calling for a much larger, unconventional rate cut.

A letter published on Monday, September 16th, Eastern Time, revealed that three Democratic U.S. senators, Elizabeth Warren, Sheldon Whitehouse, and John Hickenlooper, jointly wrote to Federal Reserve Chairman Powell, urging for a 75 basis point rate cut at the latest Federal Open Market Committee (FOMC) meeting on September 17th and 18th. In the letter, these senators stated that they have been calling for a rate cut for the past few months, and in fact, a rate cut may now be too late as the Fed's delay has threatened the U.S. economy, with the Fed lagging behind the situation.

In addition to mentioning that inflation is clearly falling towards the Fed's target of 2%, the aforementioned joint letter also cited a column published by Reuters last week, suggesting that inflation may soon fall below the Fed's 2% target. Considering Powell's testimony in July to the Senate where he stated, "High risks are not the only risks we face," a rate cut that is too late or too small could unnecessarily weaken economic activity and employment, with employment data already slowing down. Therefore, the Fed should act decisively from the beginning with a significant rate cut to avoid the risk of an economic downturn.

In the conclusion of the joint letter, the three senators pointed out:

"If the Fed is too cautious in cutting rates, it will unnecessarily face the risk of an economic downturn. The FOMC must consider implementing rate cuts more proactively to reduce potential risks in the labor market."

Commentators believe that the joint letter highlights the challenging political backdrop the Fed is facing. While Fed officials have repeatedly insisted that monetary policy will not be influenced by domestic political factors, they are still under scrutiny from various political corners.

It is worth noting that a 75 basis point rate cut is higher than the market's expectations even after the repeated increase in rate cut expectations. On Monday this week, following articles by senior Fed reporters from the Wall Street Journal and the Financial Times suggesting a 50 basis point rate cut, the probability of the Fed announcing a 50 basis point rate cut after this week's meeting on Wednesday has further increased in the financial markets.

Linked to the Fed's decision on Wednesday, the trading price of Monday's swap contracts shows that investors expect a rate cut of 50 basis points by the Fed to be over 50%, whereas last week, they almost considered the possibility to be negligible. Pricing of Monday's swap contracts also indicates that investors expect a total rate cut of around 118 basis points by the end of the year.

Data from the London Stock Exchange (LSEG) shows that the futures prices of federal funds rate on Monday already reflect a close to 60% probability of the Fed cutting rates by 50 basis points this Wednesday. The yield on the two-year U.S. Treasury, sensitive to interest rates, fell below 3.53% in pre-market trading on Monday, hitting a new intraday low since September 2022 set last Wednesday BlackRock's strategists warned on Monday that the market's bet on the magnitude of the Fed rate cut is unlikely to materialize. BlackRock's Chief Investment Strategist Wei Li said that day that the speculation that the Fed will be forced to accelerate rate cuts due to its reluctance to ease too late is incorrect, and she expects the Fed to only cut rates by 25 basis points on Wednesday. She said:

"We believe the market has priced in the depth of the rate cut cycle a bit too much. The rate cut cycle is about to begin, but it may not be as deep as the market expects."