Before discussing this issue, let's first review the recently released economic and employment data, which is mixed: This week's CPI report shows that the strong housing costs have weakened the possibility of a 50 basis point rate cut next week, but another report on Thursday showed that the Fed's preferred inflation indicator, the basic price in August, may be much more moderate. At the same time, the recruitment situation in June and July was weaker than the initially announced data, while job growth in August showed some improvement.

Next week's economic expectations are equally important: The quarterly economic forecast to be released by the Fed at the next meeting may further complicate the issue. These forecasts will show how many rate cuts officials expect this year. Foster, an economist who served as a senior adviser to Powell, said that the number of rate cuts in the coming months will be more important than the magnitude of the initial action. The dot plot to be released next week is not the final result of the committee's deliberations, but it may be just as important to investors as the size of the rate cut, especially if officials choose a smaller rate cut.

As the market currently expects the Fed to cut rates by more than 100 basis points this year, if the rate cut is smaller than expected, it may lead to a market correction, tightening the financial environment and pushing up borrowing costs as the Fed lowers short-term interest rates.

Currently, the market's debate on the magnitude of the rate cut next week is divided into two camps, and they seem to have their reasons to support their positions.

Reasons to support a 25 basis point rate cut by the Fed:

1. If the economy appears to be weakening, a larger rate cut can be made in the future.

The Fed usually prefers to make adjustments in increments of 25 basis points because smaller adjustments give them more time to study the impact of their policy changes. Esther George, who served as president of the Federal Reserve Bank of Kansas City from 2011 to 2023, said: The Fed can say, we either maintain this momentum for a while, but if the situation looks weaker, we can also take more aggressive measures in the future.

2. It can avoid triggering inflation rebound.

According to current and former officials, the reason for starting with a smaller scale of interest rate cuts is the assumption that the economy is fundamentally sound. They stated that starting with a 50 basis point cut could convey greater concerns about the economy, or lead to market expectations that the Federal Reserve will accelerate the pace of rate cuts, which in turn could trigger a market rebound and make it more difficult to contain inflation.

3. Starting with a 50 basis points could lead to the market mispricing future actions.

If the interest rate cut cycle starts with a 50 basis points next week, it will mistakenly lead the market to believe that the Federal Reserve plans to cut interest rates by the same magnitude in November and December meetings. James Bullard, who served as the President of the Federal Reserve Bank of St. Louis from 2008 to 2023, said in an interview last week that this will create an expectation that the Fed will quickly transition to a neutral interest rate level that neither stimulates nor slows down growth. Considering the Fed's preference for building broad consensus and facing the challenge of explaining a larger rate cut ahead of the election, starting with a 25 basis points cut is the path of least resistance.

Supporting the Fed's initial 50 basis points cut also seems to have reasons:

1. Does the Fed still want to maintain a strict stance when the unemployment rate is rising?

Chicago Fed President Charles Evans said in an interview last week that officials need to consider whether they want to impose the strictest restrictions throughout the easing cycle when inflation is approaching 2% and the unemployment rate is higher than most Fed officials expected. When financial markets show greater concerns about the economic outlook, the Federal Open Market Committee, which is responsible for setting interest rates, usually cuts rates by a larger margin, as was the case in early 2001 and at the beginning of the global financial crisis in 2007.

2. The Fed can dispel concerns about being too slow in its actions by using extensive rhetoric.

Johns Hopkins University research fellow Faust said that I also tend to start with 50 rate cuts. The Federal Reserve can completely address investors' concerns about larger rate cuts by providing a lot of rhetoric to make it less scary. Faust said he believed that several officials expect a 100 basis point rate cut this year. If that is the case, a 25 basis point rate cut could raise an awkward question: Why would officials take larger rate cuts later this year instead of starting with a 50 basis point cut?

3. If the Federal Reserve really achieves "balance," then a 25 basis point action is meaningless.

Dudley, who served as president of the Federal Reserve Bank of New York from 2009 to 2018, said that if the risk between rising inflation and a weak labor market is really in balance, as Federal Reserve officials have said, then the Federal Reserve should want rates to be closer to the neutral level. Given that all Federal Reserve officials believe rates should be lower than 4%, starting with a 25 basis point rate cut is meaningless. Logically, they should move faster. In addition, last week's jobs report was not particularly reassuring, as the unemployment rate has already risen 0.5 percentage points since the beginning of the year. Typically, when the unemployment rate rises a little, it tends to continue rising, and by a lot. Especially in recent months, the real estate market has been weak, and although the construction industry added jobs in August, the decline in new residential construction suggests that there may be another weak factor in employment prospects.

Will the Federal Reserve cut interest rates as expected by the market in this meeting? What impact will it have on the stock market? Welcome mooer to make an appointment to watch the September FOMC interest rate meeting~

Editor/Somer