As the Federal Reserve is about to announce its latest interest rate decision, the market has not yet formed a consistent consensus on the extent of the interest rate cut expectation for this week. In the recent debate about whether the rate cut should be 50 basis points or 25 basis points, last week's August CPI report showed that the core price increase exceeded expectations, reducing the possibility of a 50 basis point rate cut. Later last week, after media reports that policymakers were still deciding on a larger rate cut, traders had diverging views on the extent of the rate cut.

Overall, traders are still betting on the possibility of the Federal Reserve making a substantial 50 basis point rate cut at the conclusion of this week's interest rate meeting. According to the CME FedWatch tool reflecting the trend of the federal funds futures market, the market predicted a 50 basis point rate cut probability of 61% on Monday, compared to 50% last Friday and 30% a week ago. There is still no consensus on a 75 basis point rate cut.

The market expects a reduction of about 250 basis points in the next 12 months. The current debate in the market about the Fed's Wednesday action indicates that investors expect a significant 50 basis point cut this month, totaling 125 basis points for the year.

The level of disparity between the interest rate decision results and market pricing may be significant.

A chart from Deutsche Bank shows that regardless of future trends, the disparity between the federal funds rate and market pricing may be the largest in 15 years. If the FOMC cuts rates by 25 basis points, the unexpected expectation for September federal funds could be 15 basis points, and if the Fed cuts rates by 50 basis points, it could be -10 basis points; both would be the largest disparity since 2009. The chart indicates that current market pricing suggests the Fed will cut rates to the level of around 40 basis points.

Matthew Raskin, the head of interest rate research at Deutsche Bank, stated, "We will either see more media-guided information today leading the market back to 25 basis points, or the Fed will ultimately announce 50 basis points on Wednesday."

Deutsche Bank's Chief Forex Strategist Kit Juckes said in a report on Monday that recent US economic data seems to be in line with the 25-basis-point rate cut by policymakers, but the 'only question is whether the market can force the Fed to act.' Juckes pointed out that August retail sales and industrial production data will be released on Tuesday, and the Fed will announce its policy decision this week. Juckes said, 'If weak retail sales further push up pricing, and if the Federal Open Market Committee (FOMC) fails to deliver the expected rate cut, will they be concerned about being 'behind the curve'?' Economists at Deutsche Bank originally expected a 25-basis-point rate cut.

Vanda Research's Forex Strategist and Senior Strategist Viraj Patel said in an article on Monday, 'This is not the first time the market has disagreed on whether the Fed will cut rates by 25 or 50 basis points. Market pricing drifted towards a 50-basis-point rate cut the day before the meeting. The encouraging aspect of this story is that, regardless of where pricing stands at the end of today, the Fed is likely to align with the market.'

Wall Street banks have differing views

In this context, Wall Street banks have differing expectations for the rate cut this week.

BlackRock: Anticipating a 25-basis-point rate cut

BlackRock Investment Institute stated that the market's expectations for the size of the Fed's rate cut seem overly optimistic, due to ongoing inflation risks. The dynamics of the labor market are key to BlackRock's viewpoint.

Jean Boivin, head of the BlackRock Investment Institute, said in the weekly commentary, 'After the Fed completed the fastest rate hike since the 1980s, the market has quickly digested rate cut expectations, and has digested rate cut expectations during rising inflation. As the Fed prepares to start cutting rates, the market is digesting expectations of a rate cut as large as in previous recessions. We believe that such expectations are somewhat overstated.'

Blackrock says that the cooling of inflation may be temporary. Boivin said, "The normalization of spending and supply mismatch after the epidemic has basically ended, and immigration may fall back to historical trends. Once this happens, the economy will be unable to increase employment as quickly as in the past without causing inflation."

Blackrock stated that due to the expected large interest rate cuts by the Federal Reserve, the short-term US Treasury bond yields have decreased, and the company has reduced its bond holdings, pointing out that the 10-year US Treasury bond yield touched a 15-month low last week.

Boivin said that although wage growth has slowed, this is not enough to indicate that the core inflation rate may fall to the Fed's 2% target. In addition, despite the recent rise in unemployment rate causing concerns about economic recession, employment is still growing. Boivin stated, "Supply constraints from formidable forces, or structural shifts, will exacerbate global inflationary pressures. This is why the Fed and other central banks will maintain high interest rates for a longer period."

JPMorgan: Expected to cut interest rates by 50 basis points

JPMorgan's global head of research stated that the Federal Reserve appears to be prepared to cut interest rates by 50 basis points this week, a larger magnitude than the standard 25 basis points, while signaling the forthcoming implementation of more accommodative policies to the market.

While the market is still debating whether the Federal Reserve will cut interest rates by 50 basis points or 25 basis points on Wednesday, JPMorgan's Joyce Chang stated that the investors she spoke to are more concerned about the broader economic outlook. Chang stated on Monday, "We still stick to the forecast of a 50 basis point rate cut." She said that Federal Reserve decision-makers "now have room for rate cuts," and "taking more action may send the right signal."

Chang pointed out that the upward pressure of the job market on inflation has "weakened," coupled with the current level of monetary policy constraints, making this week an ideal time for the Fed to cut interest rates by 50 basis points. The bank's economists currently forecast a 50 basis point rate cut in November and a 25 basis point rate cut in December.

If the Federal Reserve chooses to cut interest rates by 50 basis points on Wednesday, it will raise concerns about the economic outlook, Powell said, adding that policymakers are monitoring the slowdown in the labor market.

Chang said, "Our feeling is that the risk of an economic recession—it may occur in the second half of 2025, but it is not imminent yet." She said she is not as worried about the labor market as others, because household surveys show that consumer demand still exists, and there have been no "massive layoffs." Chang said, "In any case, I think the tone of the Fed this week will be relatively mild."

U.S. officials "petition" the Fed to cut interest rates by 75 basis points

A more aggressive scenario is that U.S. government officials have called for a 75 basis point interest rate cut by the Fed. According to reports, three Democratic senators, Elizabeth Warren, Sheldon Whitehouse, and John Hickenlooper, wrote to Fed Chair Powell and other relevant policymakers, advocating for a 75 basis point interest rate cut to protect the U.S. economy from a potential recession.

The three senators stated in the letter, "If the Fed is too cautious in cutting interest rates, our economy may fall into recession, which is unnecessary." The letter was sent a few days before this week's interest rate decision.

Warren, Whitehouse, and Hickenlooper added, "Now is the time to cut interest rates quickly" because "employment data adjustments are slow, so the Fed should cut rates in advance to avoid sliding into a potential crisis."

The senators' letter expressed their concern about the latest employment data, stating that "it is obviously time for the Fed to cut interest rates," and went on to say, "In fact, it may be too late: your delay has already threatened the economy, leaving the Fed behind the curve."

It is worth noting that, despite the fact that Federal Open Market Committee officials have recognized that the labor market is cooling, they still believe that the current employment environment is stable. In response to this letter, a Fed spokesperson said, "We have received this letter and plan to respond."

Editor/Lambor