The Federal Open Market Committee (FOMC) meeting of the Federal Reserve that ends this Wednesday is perhaps the one that has most resembled a football game. It is no longer that the result will be known until the end, but rather that the preview has been loaded with expectations and a certain anxiety for the “fans”, in this case the investors. The distribution of the scenario between a rate cut of 25 basis points (bps) and a cut of 50 (analysts with cufflinks on their shirts on Wall Street call this a “giant” cut) has caused everything. type of pirouettes in market betting And poisoned the debate to the point that the Fed, as independent as it claims to be, will not be able to abstract itself from it. More important than the magnitude of the reduction, what is important is the future dynamic that suggests one option and then another. In the midst of this struggle, The Fed itself has encouraged the “money in the air” interpretation. Something that is difficult to understand when the majority of analysts are clear that the hidden “temptation” of the central bank is a moderate reduction that reminds us who is in charge here. The precedents provided by the past do not shed much light on the panorama either (since 1990, five cycles of reductions began with a 50 basis point reduction and four with a 25 basis point reduction).
In a commentary this Wednesday, ING bond strategists explain: Why the Fed should be “tempted” to cut rates by 25 basis points. “The market is urging the Fed to cut 50 basis points now. This is not fully priced in, but overall the market is more supportive of a 50 basis point cut than a 25 basis point cut. If the Fed does cut 50 basis points, a 50 basis point cut could be justified on the grounds that it anticipated events and delivered an undervalued 50 basis point cut. The counterargument is that a 50 basis point cut is meeting the market’s demand for a large cut. space, which while not terrible, could be a mild irritation to the Federal Reserve,” writes the team led by Padhraic Garvey.
This is precisely where the argument that the 25 basis point cut is “tempting” lies. “It’s narrower. It doesn’t give risk assets the juice they crave. And in some ways, the Federal Reserve regain some control by deciding not to give in to the pressure market sentiment in favor of a deeper cut. That’s why we’re broadly in favor of a 25 basis point cut. We can see the pendulum swinging toward a 50 basis point cut. But in some ways, a more moderate 25 basis point move might be enough for the Federal Reserve to make an even bigger statement than a 50 basis point move would be,” analysts at the “orange” bank’s research department explain.
If the Fed is so clear that the 25 basis point cut is the one that suits it best, it is somewhat odd that last week the man to whom the central bank is “whispering,” the journalist of The Wall Street Journal (WSJ) Nick Timiraos published that the internal debate between one increase and another is more intense. The information that appeared just after the macroeconomic data such as the August employment report or the CPI of the same month gave a little more basis to this moderate decrease. The news from Timiraos and Bill Dudley’s wordsFormer Fed chairman, who said he would vote for 50 points if he were now on the FOMC, has triggered the odds of a “jumbo” cut, giving them an advantage until today.
What was the point of the flight to Timiraos? One possibility is that the “hidden temptation” theory is collapsing under its own weight and the Fed prefers a brutal reduction to sit back and watch its work. before the US presidential elections “contaminate” everything. “Historically, the Federal Reserve has preferred to avoid changing monetary policy between Labor Day (September 1) and Election Day to avoid appearing politically interested,” said Philip Orlando, chief equity strategist at Federated Hermes. Another, more common possibility, is that the Fed realized that went too far with the restriction and take advantage of the market’s willingness to ease the yoke before it worsens (the labor market is already showing a clear cooling). It also cannot be ruled out that the central bank has tried to maximize equality between the two bets so that, whatever its decision, the disappointment is the least possible for the “wounded”.
“We believe the Fed views the US economy as being in an acceptable position at the moment. In that sense, if a 50 basis point cut occurs (which is not our base case), we do not expect the market to signal that the Fed is panicking. The rhetoric at the press conference would likely indicate that the fed funds rate is too restrictive, given that the labor market is cooling and inflation remains close to target, and even a 50 basis point cut would still be enough to keep rates in restrictive territory. This would be a. message similar to the one we received from the European Central Bank and the Bank of England when they began their respective cut cycles earlier this year. To preserve a healthy unemployment rate in the low-mid 4% range, it is reasonable for the Fed to ‘bring forward’ rate cuts and move towards more modest moves at upcoming meetings,” said Felipe Villarroel, director of TwentyFour AM (Vontobel Boutique).
Similarly, Villarroel counters, “we doubt that a 25 basis point cut would suggest that the Federal Reserve is behind schedule. In that case, the tone of the press conference would likely focus on the ability and willingness to cut 50 basis points in the future if needed, and in which the central bank sees several cuts in the not-too-distant future in its central scenario.
Melson (Natixis): “Failure to reach 50 basis points would lead to a tightening of financial conditions, pushing market rates higher at the very moment when the Fed begins its easing cycle”
“While the consensus in the markets is that a 50 basis point move would spook market participants by suggesting the Fed knows something we all don’t, it simply reflects where tight monetary policy currently stands in an environment where the unemployment rate has already exceeded the Fed’s estimates for year-end and inflation is well below its estimates,” agrees Garrett Melson, portfolio strategist at Natixis IM Solutions.
For this analyst, The biggest problem would be communication: “Failure to reach 50 basis points would tighten financial conditions, pushing market rates higher just as the Fed begins its easing cycle. Conversely, 25 points would place greater emphasis on quarterly projections (employment and inflation) and the dot plot (dot plot with the rate forecast) with the possibility that several members will put easing at 100 basis points by year-end, while with only two meetings left, the Fed is considering cutting 50 basis points at least once. year-end, the The question would be why didn’t they start with that?. And that communication problem would likely fuel fears of further delay from the Fed,” Melson said.
So, says the Natixis strategist, “we expect Powell to push for a 50-point cut to explicitly demonstrate the Fed’s desire to stabilize labor market conditions. With little support to oppose the chairman’s arguments, we’ll have to wait for the rest of the vote.” members must fall into line.
THE concern about market rates It is also echoed by ING analysts: “As for market rates, a 25 basis point cut leaves market rates vulnerable to a hike, since they already price in quite a few cuts, and with a fairly aggressive haircut ahead of time, as can be inferred from the two-year yield, with a cut of about 175 basis points in the updated Fed benchmark rate, the decision should, in theory, leave room for market rates to go lower. However, we have a sneaking suspicion that we might see a ‘surprise’ reaction to market rates rising relative to what the Fed is doing has already happened.”
“If they are at 25 basis points this time, the probability that they can reach 100 basis points by the end of the year is quite slim. If 50 is not reached, there will be significant movements market prices,” says Justin Onuekwusi, investment director at St James Place Management.
