US Federal Reserve’s rate cut: Rate cut likely, but by how much? Will it be a 25 bps or 50 bps?

Although the Federal Reserve‘s decision regarding interest rates is yet to be confirmed, there is widespread belief that a rate cut is imminent. Now the central question is whether the cut will be 25 basis points (bps) or a more substantial 50 bps.

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Most market participants expect the Fed to cut rates by 25 bps

Sujan Hajra, Chief Economist and Executive Director at Anand Rathi Shares and Stock Brokers, believes that a 50 bps rate cut, while possible, is unlikely. He told Mint, “While some recent data, particularly related to the labor market, has underperformed expectations, it’s not yet enough to suggest a significant deterioration in economic conditions.”

Hajra points out that although the market anticipates a front-loaded cut, the Fed seems to favour a more gradual approach. “A 25 bps cut could disappoint some market participants,” Hajra notes, but a 50 bps cut could signal deeper concerns about the economy, potentially causing negative reactions.

Anitha Rangan, an economist at Equirus, shares a similar view, stating, “Unemployment at 4.2 percent declined by 4.3 percent in the previous month, and wage growth was 3.8 percent again higher than the previous month.”

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Rangan believes the Fed will likely opt for a 25 bps cut, which is already priced in by the market. She told Mint, “Overall, a 25 bps rate cut should not be disappointing as it is the base case, with a 71 percent probability.” However, she warns that the Fed’s language regarding future rate cuts will be crucial in determining market sentiment.

US inflation report puts pressure on fed to cut rates

Jack Janasiewicz, portfolio manager, at Natixis told The Economic Times, “Maybe the market was looking for a softer inflation print which would give the Fed more reason to cut by 50 basis points next week. This report was in-line to slightly hotter than expectations. As a result, this puts a bit of pressure on the Fed to cut by only 25 basis points.”

Joseph Thomas, Head of Research at Emkay Wealth, agrees that a 25 bps rate cut is already anticipated, which could lead to limited market reaction. However, he points out that a larger 50 bps cut would have a greater impact but may also signal that the Fed is more concerned about a slowing U.S. economy. “A second and more important impact of the rate cut is that it will lead the market to conclude that a slowdown is gradually taking grip on the U.S. economy,” Thomas notes.

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Jennifer Lee, a senior economist at BMO Capital Markets, told Yahoo Finance the same thing. “A 50 basis point cut would reek of panic, and it’s almost like we’re totally behind the curve at this point,” she said.