Today, it is nearly certain that the Federal Reserve will lower interest rates for the first time in over four years. However, it remains unclear whether the Fed will opt for a 50-basis-point cut or a smaller adjustment. Experts warn that markets may be overly optimistic about the prospect of a rate reduction.
50 Basis Points Cut on the Table
Currently, the interest rate futures market shows a likelihood of over 60% for a 50-basis-point cut. In the previous meeting, Fed Chairman Jerome Powell indicated that addressing inflation nearing the 2% target was a priority, though he did not specify a rate. The prevailing view suggests that a 25-basis-point cut would be a more suitable starting point for the Fed’s easing cycles in times without crises.
Options pricing indicates that the S&P 500 index could fluctuate by approximately 1.1% on Wednesday. Recently, the rise of U.S. stocks makes it challenging for the market to be disappointed if the Fed opts for a smaller cut.
KPMG’s chief economist, Diane Swonk, stated that a 50-basis-point cut is definitely on the table, though Powell may not secure sufficient support for this option. Tara Hariharan, managing director of global macro hedge fund NWI Management, commented that with U.S. stocks near all-time highs, the risk-reward balance seems weak for further gains.
Rate Cut Expectations May Be Detached from Market Realities
On the other hand, Michael Rosen, managing partner and chief investment officer at Angeles Investments, believes the current bond market is pricing in the Fed’s rate cuts too aggressively. The market anticipates a 250-basis-point reduction next year, but according to Rosen, this would only be feasible in a recession scenario. He suggested that short-term U.S. Treasury yields might decline below market expectations, while long-term yields could rise.
Angel One analyst Saish Sandeep Sawant Dessai warned that “the real risk is the market pricing in a very dovish stance,” which could lead to rising Treasury yields and the dollar, further driving down gold prices.
