After the release of US CPI data last week, well-known macro journalist Nick Timiraos, known as the 'Fed megaphone', wrote that the Fed will probably cut interest rates by 25 basis points. But just a few days later, his opinion changed.

On Tuesday, local time and on the eve of the Fed's interest rate decision release, Timiraos once again stated in a post that the Fed will definitely cut interest rates this week, but it is still uncertain whether the cut will be a larger 50 basis points or the traditional 25 basis points. The suspense remains until the last minute, requiring Powell and his colleagues to carefully weigh their options.

Timiraos pointed out that economic data in the past few months shows that the inflation rate is steadily declining. However, the labor market has cooled down, with the unemployment rate rising from 3.7% at the end of last year to 4.2% in August. In the three months ending in August, the monthly increase in employment fell from 0.212 million people in December last year to an average of 0.116 million people.

The Federal Reserve's goal is to maintain a stable employment situation while inflation pressures ease, but now balancing the two has become a question.

Former Fed senior advisor Ingris stated, "The key issue for Fed officials in this meeting is their perception of risk balance. If they are more concerned about economic growth and employment rather than inflation, then a more cautious approach with a 50 basis point rate cut would be appropriate."

A smaller 25 basis point rate cut is based on different considerations, including a strong economic foundation or the risk of increasing risk appetite if the rate cut is too fast, leading to persistent high inflation.

Ingris claims that a few weeks ago, he believed that a 25 basis point rate cut was appropriate. However, the recent downward trend in labor market data has left him somewhat concerned, especially considering that even after two or three rate cuts, interest rates will still be at relatively high levels.

Timothy Raukus mentioned that Federal Reserve officials tend to raise or lower interest rates by 25 basis points to study the impact of these measures. However, when they believe that their interest rate position is not consistent with risk balance, they will act more quickly. For example, during the epidemic, Federal Reserve officials raised rates significantly to deal with high inflation.

Difficult decision

In fact, late last week, investors generally expected the Fed to cut interest rates by 25 basis points, but then many media outlets, economists, and even members of Congress called for a larger rate cut.

For example, former New York Fed Chairman Dudley said last Friday that it is still possible to cut interest rates by 50 basis points at next week's Fed interest rate meeting. "I think there are very good reasons to cut rates by 50 basis points. I know what I'm fighting for."

Senators Elizabeth Warren, Sheldon Whitehouse, and John Hickenlooper wrote to Powell on Monday, saying, "The committee must consider more aggressively 'front-loaded' rate cuts to mitigate potential risks facing the labor market."

Ed Hyman of Evercore ISI is one of the most highly regarded and respected economists on Wall Street. He expects the Fed to cut rates by 50 basis points on Wednesday and ultimately achieve a soft landing. "I would be shocked if they don't cut rates by 50 basis points tomorrow."

Timothy Raukus stated that as important as the Fed's decision on the rate cut this week is its quarterly economic forecasts, which show officials' expectations for the year-end interest rate level. If more officials expect a total cut of 100 basis points this year, it would mean that there will be at least one 50 basis point cut this year.

But if they wait until later this year to make a larger rate cut, it may raise an awkward question: why is this the best course of action.

In short, this week's policy decision was a difficult choice, with 12 decision-makers voting on the policy, there may be opposing votes, and since 2005, no Federal Reserve Board member has dissented on interest rate decisions.

Editor/Rocky