Source: Caixin.
Author: Huang Junzhi.
Goldman Sachs strategist Paolo Schiavone said on Friday that a 25 basis point cut is still the most likely scenario. CME Federal Reserve Watch Tool shows that the market expects an equal probability of a 25 basis point and a 50 basis point rate cut at the next meeting, both at 50%.
For Wall Street now, a rate cut by the Federal Reserve next week seems to be a certainty, the biggest question now is whether it will be a 25 basis point or a 50 basis point cut. Goldman Sachs currently seems to lean towards the former. Strategist Paolo Schiavone of the bank said a 25 basis point cut is still the most likely scenario.
Earlier this week, data released temporarily eliminated hope for a 50 basis point rate cut: the core CPI index, excluding volatile food and energy prices, rose 0.3% month-on-month in August, the highest increase in four months, slightly higher than the median expected increase of 0.2%.
But now, with the calls of some experts, the situation has returned to a 50/50 chance. For example, former New York Fed Chair William Dudley said on Friday that it is still possible to cut rates by 50 basis points at the upcoming Fed meeting. He said, 'I think there are strong reasons to cut rates by 50 basis points.'
In addition, Wall Street Journal reporter Nick Timiraos, known as the 'Fed Whisperer', also hinted that a 25 basis point rate cut is the 'path of least resistance', but at the same time, starting with a 50 basis point cut can reduce market debates about the magnitude of future rate cuts.
As of now, CME Federal Reserve Watch Tool shows that the market expects an equal probability of a 25 basis point and a 50 basis point rate cut at the next meeting, both at 50%.
However, Schiavone pointed out that although the upcoming FOMC decision may cause market volatility, the Fed is more likely to choose to cut interest rates by a relatively moderate 25 basis points. This judgment is based on experience and market logic. He also pointed out that what Nick Timiraos said is not an "official source of news."
He further explained that "if a 50 basis point rate cut means that the Fed may be more inclined to a significantly loose monetary policy, which typically means that the Fed is more concerned about economic slowdown and believes that a larger rate cut is needed to stimulate economic growth."
"But I believe that the combination of fiscal and monetary policies, coupled with foreign capital inflows, can help maintain economic growth and counter recession risks," he added.
In addition to Goldman Sachs, some Wall Street bigwigs also predict that there is a greater possibility of a 25 basis point rate cut next week, as they believe that the FOMC will relax monetary policy by using the smallest magnitude in its arsenal without reigniting inflation. Bank of America analysts Aditya Bhave and Shruti Mishra said, "The likelihood of a 50 basis point rate cut is still small."
UBS senior US economist Brian Rose, while not ruling out the possibility of a 50 basis point rate cut, did not include it in his expectations. In his latest report, he wrote, "We believe that the inflation data has been good enough to allow the Fed to start cutting rates in September, but it hasn't given them a strong reason for a steep rate cut."
"August retail sales and industrial production data will be released on September 17th, which may affect the Fed's decision, but these data may have to be significantly weaker than expected to trigger a 50 basis point rate cut," he added.
Editor/rice