FED Rate Cuts September 2024: Why Markets Are Suddenly Expecting a 50 Basis Point Cut

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The Kobeissi Letter has recently spotlighted a significant shift in market expectations regarding the Federal Reserve’s next interest rate decision. In a dramatic turn, the odds of a 50 basis point rate cut have surged from 2% to 59% in just a few hours.

This change is surprising given that no new economic data or guidance from the Fed triggered this shift, and a 25 basis point cut had been the prevailing expectation until now. 

So, what caused this sudden shift in sentiment?

Wall Street Journal’s Provocative Analysis

The catalyst for this change appeared to be an article from the Wall Street Journal released early Sunday morning. The article questioned whether the Fed’s current target rate of 5.25% to 5.50% might be too high, considering it’s the highest rate since 2001. The piece argued that inflation shows signs of cooling, with the Consumer Price Index (CPI) at 2.5%.

It suggested that the gap between Core CPI and the Fed’s 2% target is largely due to lagging effects from housing and auto sectors. More critically, it highlighted a weakening labor market, noting an increase in unemployment from 3.5% to 4.2% since July 2023 and frequent downward revisions in job data over the past two years. Over one million jobs have been revised lower during this period, signaling potential trouble in the job market.

Financial Times Joins the Discussion

Following the Wall Street Journal’s article, the Financial Times published a similar analysis, advocating for a 50 basis point cut to prevent overly restricting the economy and mitigate adverse market reactions to any weak data releases before the Fed’s next meeting. This sentiment was echoed by Fed member Dudley, who, despite the Fed’s blackout period, stated that he expects the Fed to implement a 50 basis point cut, attributing it to Chairman Jerome Powell’s preference for an aggressive approach.

What to Expect? 

As the Fed’s decision approaches, market volatility is expected to intensify. The Kobeissi Letter notes that the market is pricing in a potential move of ±96 points for the S&P 500 post-decision, translating to about 1.7% or roughly 20% of the index’s average annual return in a single day. Historically, the S&P 500 has seen a 15% increase within a year following the first rate cut if no recession ensues. On the flip side, if a recession occurs, the index tends to fall by 15% within the same timeframe.