...now the Fed would have to deliver 50bps cut, otherwise we can expect a market tantrum.
...I think they should do 50bps but they may want to do 25bps instead leaving it open for larger cuts in the months ahead if CPI continues to deflate.
Timothy MooreBefore the Bell editor
Sep 17, 2024 – 3.37am
JPMorgan said it continues to expect a 50 basis point cut on Thursday AEST. The likelihood of a Fed starter half-point move continues to edge up in the absence of any apparent effort by the Fed to correct the tone of several published stories, Evercore ISI said.
The probability of a 50bp cut has surged to 67 per cent, according to CME Futures data. That was 50 per cent on September 13, 30 per cent a week ago and 25 per cent a month ago.
In contrast, the probability of a 25bp cut has tumbled to 33 per cent from 50 per cent on Friday, 70 per cent a week ago and 75 per cent a month ago.
Morgan Stanley’s economists still see a path to a 25bp cut. However, the firm’s US equities team is hedging. “In the very short-term, we think the best case scenario for equities this week is that the Fed can deliver a 50bp rate cut without triggering either growth concerns or any remnants of the yen carry trade unwind—i.e., purely an “insurance cut” ahead of macro data that is assumed to stabilise.
“Conversely, given the uncertainty priced into the bond market around the size of this first cut, the worst short-term case for stocks would simply be a sharp negative price reaction post the FOMC meeting that signals a lack of confidence in the fundamental outcome and questions whether rates have stayed too high for too long.”
Wolfe Research’s Chris Senyek said “Looking out from now to year end, we remain bullish on stocks as Fed cuts take hold and as election uncertainty wanes, and our favourite industries to own are capital markets, analog semis, and transports.”
Senyek also said if Powell & Co. deliver a 25 bps rate cut “(as we expect)” markets will likely ‘sell the news’ with defensive sectors leading the way (Staples, Utilities, and REITs) while a 50 bps cut would likely keep last week’s market rally going over the short-term lead by cyclical areas of the market including Financials, Discretionary, and parts of Tech and Industrials.
In a series of posts on X, Paul Krugman argues that rates are simply “too high” and even with a 50bp cut, the Fed’s key rate would be 300bp higher than before the pandemic. “How can this be justified?”
“The main answer seems to be that the economy isn’t in a recession (yet). But this looks like a variant on Milton Friedman’s fool in the shower — the guy who alternately freezes and scalds himself because he’s too data-dependent,” Krugman said.
”In this case the water is getting cooler but it’s still tolerable — and the Fed is waiting to adjust the taps until it turns ice-cold. Maybe it’s PTSD from the unexpected inflation of 2021-22, but it’s still a big mistake.”
