As the US labor market sends out weak signals, the Fed is almost certain to cut interest rates at the upcoming meeting. However, there is still disagreement on the extent of the rate cut by the world's largest central bank, with some analysts believing that a 50 basis point cut would send out bullish signals, while others point out that such a substantial rate cut would send the wrong message to the market.

Michael Yoshikami, CEO of Destination Wealth Management, said on Monday that a larger rate cut by the Fed would indicate that the central bank is ready to take action without sending a signal of deeper economic recession.

Yoshikami said in an interview, "I wouldn't be surprised if they cut rates by 50 basis points directly, which would be seen as a very bullish signal that the Fed is taking necessary measures to support job growth," adding, "I think the Fed is now ready to take action in advance."

Prior to making these remarks, Nobel laureate in economics Joseph Stiglitz also expressed similar views last Friday, suggesting that the Fed should cut rates by 50 basis points at its next meeting and criticizing the Fed's previous policy tightening as "too fast and too much."

The market widely expects the Fed to cut rates at the meeting on September 17-18, but the extent of the rate cut remains uncertain. The weak employment report last Friday increased concerns about a slowdown in the labor market and briefly led to speculation of a larger rate cut, before returning to normal.

According to the CME Group's FedWatch Tool, traders currently estimate a 75% probability of a 25 basis point rate cut in September, while the probability of a 50 basis point cut is 25%.

Yoshikami acknowledges that a larger rate cut could exacerbate concerns about a US economic recession, but he insists that this view is exaggerated, pointing out that the unemployment rate and interest rates are still at historic lows, while corporate profits have remained strong.

Recently, the S&P 500 index had its worst week since March 2023. Yoshikami believes that this selloff is based on the "enormous profits" accumulated last month. Although the major US stock indexes rose in August and the market was volatile at the beginning of the month, September has traditionally been a weaker trading period.

Thanos Papasavvas, founder and chief investment officer of ABP Invest, also acknowledges increased concerns about a potential economic downturn in the USA.

The research institution recently adjusted its probability of a US economic recession from 25% in June to a "relatively manageable" 30%. However, Papasavvas stated that the fundamental components of the economy - manufacturing and unemployment - "still have resilience".

Papasavvas said on Monday: "We are not particularly worried about the USA entering a recession." These views sharply contrast with those of other market observers.

Lagarias, chief economist of Forvis Mazars, stated: "I do not see the urgency of a 50 basis point rate cut." He added: "A 50 basis point rate cut could send the wrong message to the market and the economy. It could create a sense of urgency, you know, it could become a self-fulfilling prophecy."

Editor/ping