"Won't Be Surprised by 50bp Cut"
Market Reflects 71% Probability of 25bp Cut
With the Federal Reserve (Fed) of the United States expected to cut its benchmark interest rate, opinions are divided on the size of the cut. While some believe there is room for a 'big cut' (a 0.50 percentage point reduction), the market is leaning towards a 0.25 percentage point cut.
On the 9th (local time), Michael Yoshikami, CEO of Destination Wealth Management, said on CNBC's "Squawk Box Europe," "I would not be surprised if the rate cut jumps up to 50 basis points (1bp = 0.01 percentage points)."
He added, "(A 50bp cut) would be seen as a positive signal that the Fed is doing what is necessary to support job growth," and "I think the Fed is ready to get ahead at this point." He also noted that while a big cut could heighten concerns about a recession, the fear of recession is exaggerated.
Earlier, Joseph Stiglitz, Nobel laureate and professor at Columbia University, made similar remarks. At the annual Ambrosetti Forum held in Italy on the 6th, he said, "The Fed tightened too far, too fast," and "As a result, the inflation situation worsened." He also stated, "A big cut would provide substantial help with inflation and employment issues."
The market expects the Fed to cut rates at the Federal Open Market Committee (FOMC) meeting scheduled for the 17th and 18th. However, the size of the cut remains uncertain.
After the August U.S. nonfarm payrolls report released on the 6th showed an increase of 142,000 jobs, below Wall Street's forecast of 164,000, the possibility of a big cut gained some traction.
Currently, the prevailing view in the market is that the Fed will cut rates by 25bp. According to the Chicago Mercantile Exchange (CME) FedWatch on the day, the federal funds futures market fully prices in a rate cut of at least 0.25 percentage points in September. The probability of a 0.25 percentage point cut next month is priced at 71%, while the chance of a 0.5 percentage point cut is priced at 29%. After the August employment report was released, the big cut forecast temporarily surged to 45% before falling back.
The market is closely watching the August Consumer Price Index (CPI) released on the 11th and the Producer Price Index (PPI) due on the 12th.
Phil Blancato, Chief Market Strategist at Ozaic Wealth, said, "The market expects a modest cut and has already priced in the Fed's rate cut," adding, "Whatever decision is made, volatility will be high afterward."
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