Tonight, the global market is destined to have a sleepless night!

The Federal Reserve's interest rate cut in September is a done deal, but there is a fierce debate over the magnitude of the rate cut. The camps advocating for a 50 basis point cut and a 25 basis point cut continue to argue with each other.

According to the latest data from the Chicago Mercantile Exchange's "FedWatch Tool", traders in the interest rate futures market currently predict a 61% probability of a 50 basis point rate cut by the Federal Reserve tonight, while the probability of a 25 basis point rate cut has shrunk to 39%.

Last week, with the release of the highly anticipated August CPI data, the sentiment favored a 25 basis point rate cut. However, as the countdown to the rate cut progressed, market pricing suddenly changed, and the sentiment for a 50 basis point rate cut surged. The rate cut expectations indicate that the market is currently undecided, highlighting the extremely complex situation the Federal Reserve is facing - whether to take preemptive action to mitigate economic recession risks against the backdrop of easing price pressures and fluctuating labor market.

25 basis points or 50 basis points, the market is fiercely debating.

Based on past experiences, the market's expectations for interest rate cuts or hikes ahead of monetary policy meetings have been almost clear. Rarely has there been such evenly matched speculation as there is currently. This monetary policy meeting is bound to cause a "turbulent" global capital market.

As the monetary policy meeting approaches, major banks are still engaged in heated debates, with strong arguments from both the 25 basis point and 50 basis point camps.

Nick Timiraos, a prominent macro reporter known as the "Fed megaphone", stated last week that the Federal Reserve is highly likely to cut rates by 25 basis points. However, his viewpoint has quickly changed. In an article published on Tuesday before the interest rate decision, Timiraos once again stated that the Federal Reserve will definitely cut rates this week, but it is still uncertain whether the magnitude of the rate cut will be a larger 50 basis points or the traditional 25 basis points. The suspense remains until the last moment and requires Powell and his colleagues to carefully weigh their options.

The significant change in interest rate sentiment within a short period of time is rare. It's understandable that the market is so anxious, after all, the depth of interest rate cuts will directly affect the market. Subadra Rajappa, Head of US Interest Rate Strategy at Societe Generale, said that if the Fed cuts rates by 25 basis points instead of 50, the market reaction will be much stronger. Statements such as positioning, optimistic sentiment, and a looser financial environment may be put to the test.

On the eve of the interest rate cut, the camp advocating a 50 basis point cut continues to expand. Jeffrey Gundlach, CEO of DoubleLine Capital and "Bond King", has publicly sided with this camp, betting that the Fed will open the interest rate cut cycle with a 50 basis point cut. Gundlach believes that the Fed is too "behind" and he is betting that the Fed is likely to lower the benchmark interest rate by 50 basis points on Wednesday and a total of 125 basis points by the end of the year. He pointed out that the US economy has already entered a recession and the Fed has maintained a tight policy for too long.

At the same time, the creator of the "Sahm Rule" holds the same opinion. Claudia Sahm stated on Tuesday that although the US economy has not entered a recession, the weakness in the labor market may concern the Fed and lead to a 50 basis point interest rate cut at this week's monetary policy meeting. However, Sahm stated that the US economy has not actually entered a recession, and the "Sahm Rule" did not take into account the current unusual economic cycle. The rule is an indicator of an economic recession, not a predictive tool.

However, institutional models suggest the possibility of a 25 basis point rate cut from another perspective. The GDPNow model of the Federal Reserve Bank of Atlanta predicts a robust growth of 2.5% in the third quarter, and the Fed seems to have no specific reason to begin this easing cycle with aggressive measures.

According to research data from Bianco Research, among 118 Wall Street economists, 101 expect a 25 basis point rate cut, 13 expect a 50 basis point rate cut, and 4 forecast no change.

What should we pay attention to in this monetary policy meeting?

According to the schedule, the Fed will announce its September interest rate decision at 2:00 a.m. Beijing time on Thursday, and Fed Chairman Powell will hold a press conference half an hour later at 2:30 a.m.

It is worth noting that the quarterly Fed decisions are often more attention-grabbing because the outside world will have the latest economic forecasts and dot plots, which helps investors and institutions look for clues about future monetary policy. In addition to focusing on the magnitude of the rate cut, investors also need to pay attention to the signals about the future direction of expected interest rates shown through the dot plots by Fed officials.

The policy statement is also worth noting, and the wording in it may undergo various changes, including language about the balance of risks between employment and inflation. Goldman Sachs expects that the FOMC "may modify its statement to have more confidence in inflation, to describe the risks of inflation and employment more balanced, and to re-emphasize its commitment to maintaining maximum employment."

In addition, Powell's subsequent press conference is very important. Fed watchers believe that Powell is more concerned about the recent softening of the job market than the committee as a whole, and he believes that the Fed can restrain inflation without affecting the economy and employment. At that time, Powell may have to strike a balance between his own views, the committee's views, and the information conveyed by the so-called "dot plot." If there are different opinions, it could lead to significant market volatility.

Editor/Emily