Old FOMC Members Preparing Market for a 25 bps FED Rate Cut

This FOMC meeting has been very speculated, with odds of a 0.25% FED rate cut being high initially, but they changed a lot over the last few weeks. After last week’s CPI and PPI inflation numbers the odds of a 50 bps rate cut jumped to 70% almost, but they’re balancing out ahead of the FOMC meeting, however, we’re hearing previous FED members be vocal about a 25 bps cut instead.

The most significant interest rate decision of 2024 is the FED rate cut today

So, in the upcoming rate decision hinges on whether the Federal Reserve will opt for a 25 or 50 basis point cut, and each scenario carries different implications.

  • If they cut by 25 basis points, it might signal a more cautious or “dovish” approach. The Fed could be showing confidence that the economy is stable enough to require only a gradual easing of monetary policy, allowing inflation to decline without overly stimulating growth. However, this could be seen as not aggressive enough if markets expect stronger action, especially if inflation risks linger.
  • If they opt for a 50 basis point cut, it might be perceived as a more aggressive or “hawkish” cut, depending on how the Fed frames it. While it would be a larger move, the Fed might position it as a preemptive measure to ward off future economic slowdown, emphasizing that it is not panicking but taking out “insurance.” In that case, despite the size of the cut, it could still be interpreted as hawkish if the Fed signals that no further significant cuts are on the horizon.
  • An in-between scenario could arise if the Fed cuts by 50 basis points but uses dovish language, signaling that more rate cuts are coming. Conversely, a 25 basis point cut accompanied by hawkish communication—stressing data dependency and a reluctance for future cuts—could keep markets on edge.

Former St. Louis Fed President Bullard suggested a 25 basis point cut by the FED, indicating that the FOMC might opt for a smaller cut and implement three 25 basis point reductions this year while keeping the option for a larger 50 bps cut in reserve. Meanwhile, former Cleveland Fed President Mester described the decision as a very close call, reflecting the uncertainty surrounding the Fed’s approach to rate cuts. So, the chances of a 25 bps FED rate cut are getting higher and US Treasury yields are increasing, pulling the USD higher as well.

Minneapolis FED Loretta Mester

  • A good case for 25 basis point cuts lies in the Fed’s preference for a steady, measured approach. By cutting in smaller increments, the Fed can maintain flexibility and respond to evolving economic data without overcommitting.
  • A series of 25 basis point cuts signals that the Fed is committed to easing monetary policy but in a controlled manner. This approach would gradually reduce the level of restrictiveness while allowing the economy to adjust smoothly without risking inflationary flare-ups or a shock to financial markets.
  • Beginning a new phase of rate cuts suggests the Fed is shifting its focus, recognizing that it’s time to ease off from restrictive policies. The aim is to carefully lower rates while still being vigilant about inflationary pressures.
  • The Fed remains committed to its 2% inflation target but is also cautious not to stoke rising unemployment. It’s a delicate balancing act—easing just enough to stimulate the economy but not too much to risk price instability or labor market disruptions.
  • The Fed’s decisions are always centered on what’s best for the U.S. economy. Throughout this process, Fed officials emphasize that politics never influence their decision-making. The focus remains squarely on the economic outlook, inflation control, and safeguarding employment stability.
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Skerdian Meta
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Skerdian Meta Lead Analyst. Skerdian is a professional Forex trader and a market analyst. He has been actively engaged in market analysis for the past 11 years. Before becoming our head analyst, Skerdian served as a trader and market analyst in Saxo Bank's local branch, Aksioner. Skerdian specialized in experimenting with developing models and hands-on trading. Skerdian has a masters degree in finance and investment.
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