Will the interest rate be cut by 25 or 50 basis points next week? This is the biggest suspense for the market and a tricky issue for the Federal Reserve.

The recently released data has been mixed, whether it's inflation or employment data, neither has decisively determined the extent of the interest rate cut. Wednesday's CPI data showed sticky inflation, increasing the probability of a 25-basis-point cut, while Thursday's PPI data showed a significant cooling on a year-on-year basis, again raising the possibility of a 50-basis-point cut.

Nick Timiraos, a Wall Street Journal journalist also known as the 'Fed's communication society,' believes that starting with a 25-basis-point cut is the path of least resistance, avoiding causing market panic due to a large-scale cut, and the challenge of explaining a substantial rate cut before the election.

But Timiraos also stated that, compared to the size of the initial rate cut, the Fed's quarterly economic forecast to be released next week will also be closely watched for officials' expectations of the extent of the rate cut for this year. Timiraos cited former Fed advisor Jon Faust, who said that the extent of rate cuts in the coming months 'will be more important than whether it's the first time for a 25% or 50% cut.'

With the market expecting the Fed to cut rates by over 100 basis points this year, if the forecast shows a smaller rate cut, the market may pull back.

The question of how much the interest rate will be cut this year will also complicate the decision between a first cut of 25 or 50 basis points.

Timiraos quoted analysts as pointing out that if the Fed is expected to cut rates by 100 basis points this year, then starting with a 25-basis-point cut could lead to some awkwardness: with only three meetings left this year and larger rate cuts expected later, why not act sooner?

Timiraos' report has had a significant impact on the market. According to Zerohedge, after Timiraos' article was published, the market's probability of rate cuts in September significantly increased, erasing the decline after Wednesday's CPI data.

Starting with a 25 basis point decrease has the least resistance.

The Federal Reserve typically prefers to adjust interest rates by 25 basis points because smaller adjustments give them more time to study the impact of policy changes. Some Fed officials have recently stated that they would be willing to accelerate the pace once the economy appears to be weakening further.

Timiraos mentions concerns from some former and current Fed officials in the report about a 50 basis point rate cut for the first time: a substantial rate cut could convey greater concerns about the economy or lead to expectations of an accelerated rate cut, which in turn could trigger a market rebound and make the struggle against inflation more difficult.

In addition, a larger rate cut would cause the market to mistakenly believe that the Fed plans to cut rates by another 50 basis points at the November and December meetings.

Timiraos states that given the Fed's preference for building broad consensus while avoiding the challenge of explaining a substantial rate cut before the election, "starting with a 25 basis point rate cut is the path of least resistance."

Calls for a 50 basis point rate cut.

Timiraos also cited some calls for a 50 basis point rate cut in order to prevent the economy from further slowing under the pressure of past rate hikes.

"I don't think it's necessary to rush to preemptively cut rates by 50 basis points now," said former Fed advisor Faust, "but I lean towards starting with 50, and I still think the FOMC may cut rates by this magnitude."

Faust believes the Fed can address investors' fears of too large a rate cut by providing “a lot of language to make the rate cut less scary.”

Faust also said he believes some officials will forecast a 100 basis point rate cut this year. If that's the case, a rate cut of 25 basis points to start could raise some awkward questions, namely why officials expect larger rate cuts later this year without acting sooner.

Former Fed 'number three' Dudley also said that if Fed officials really believe that a balance has been struck between higher inflation rates and weaker labor market conditions, then the Fed should move interest rates closer to neutral levels. Since all Fed officials believe that this rate is below 4%, the practice of gradually cutting interest rates by 25 basis points is not reasonable. 'Logically, they should speed up the pace.'

Editor/Rocky