WSJ analyzes the Fed's dilemma of cutting interest rates by 0.25 or 0.5 points while balancing inflation risks and labor market conditions. Will Powell be bold or play it safe?


Timiraos from the WSJ is out with an analysis of the upcoming Fed rate decision. The title of the article says it all, and the author calls the decision a dilemma: whether the Fed goes big or small (or 25 basis points or 50 basis points).

Some of the highlights are;

  • The Fed is set to cut interest rates at its September 17-18 meeting, which would be the first cut since 2020.

  • The decision on whether to cut interest rates by 0.25 or 0.5 points is a matter of debate.

  • Powell's latest speech emphasized monitoring labor market risks and adjusting interest rate cuts accordingly.

  • Some analysts are leaning toward a lower discount due to strong housing costs in the latest CPI data.

  • Economic data is mixed: Hiring weakened in June/July, payroll growth improved in August, layoffs remain low.

  • Projections (dot plot) from the upcoming meeting will show the number of rate cuts expected this year.

  • A smaller cut (0.25 points) is seen as the "path of least resistance" that would prevent market panic.

  • A larger rate cut (0.5 percentage points) could act as insurance against the risks of an economic slowdown.

  • The decision reflects the Fed's strategy of balancing inflation risks against possible weakness in the labor market.

  • Analysts suggest the Fed could adjust future rate cuts based on incoming economic data and conditions.

US stocks saw more buying as investors took $50 off the table.

The Fed’s 50 basis point rate cut could unsettle markets because it could indicate the economy is weaker than expected. However, the Fed could justify the extra 25 basis points by citing the need to address inflation and the lagging impact of monetary policy.

The dot plot and central tendencies for GDP, inflation and employment will also be closely monitored.

Regardless of #Fed 's #faiz decision (25 or 50 basis points), the uncertainty and economic outlook created by this dilemma will likely lead to increased market volatility.

The Fed Chair #Powell will likely use the quiet period and two-day meeting to carefully prepare his comments, given the complexities and uncertainties involved.