On the evening of the 18th Beijing time, the US stock market opened slightly higher on Wednesday, with the three major indices maintaining narrow fluctuations in the early trading session. As of the time of publication, $Dow Jones Industrial Average (.DJI.US)$ down 0.19%, $Nasdaq Composite Index (.IXIC.US)$ up 0.03%, $S&P 500 Index (.SPX.US)$ down 0.05%. Investors are cautious and wait-and-see ahead of the Fed's interest rate decision. The market generally expects the Fed to cut interest rates for the first time in four years, but there are differences on the extent of the rate cut.

The Federal Reserve is about to start a rate cut cycle, with borrowing costs remaining at the highest level in more than twenty years for over a year.

However, traders have different opinions on whether the Fed will announce a rate cut of 25 basis points or 50 basis points on Wednesday. Currently, the market indicates a 50% probability of a larger rate cut.

The market mostly expects The Federal Open Market Committee (FOMC)(FOMC) to cut interest rates by 25 basis points to a range of 5% to 5.25%, but some expect a half percentage point rate cut. Investors believe the probability of a half percentage point adjustment is fifty-fifty.

"We like this discussion - everyone is very focused on whether it will be 50 or 25 basis points, but what's important is whether they convey the message of intending to return to neutral policy by next summer," said Samy Chaar, Chief Economist at Lombard Odier. "The worst-case scenario is if they take a 25 basis point rate cut and pretend everything is normal, when monetary policy still needs to remain restrictive."

Powell faces a challenge

The Federal Reserve will announce its decision through a meeting statement at 2:00 pm Washington time on Wednesday (2:00 am Beijing time on Thursday), followed by a press conference by Powell 30 minutes later.

Powell needs to find a balance between his own views, the views of the committee, and the information conveyed by the "dot plot" (a chart displaying individual rate forecasts) - if these narratives are inconsistent, it could pose a challenge.

Francois Rimeau, strategist at La Francaise Asset Management, said, "Given the market noise, I now expect them to cut by half a percentage point. Powell's comments, the dot plot, and economic forecasts are all equally important as the rate cut itself."

Investors expect the Fed's policy to be accommodative enough to address recent signs of economic weakness, but not enough to trigger concerns about the economy being worse than expected.

The latest quarterly forecasts released by the Fed after the two-day policy meeting will provide more insights into future borrowing costs and economic trends. Investors generally believe that this year's rate cut path will be more aggressive than the 25 basis points predicted by economists. Financial markets have already priced in expectations of a rate cut of more than one percentage point this year, implying at least one rate cut of half a percentage point.

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

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 shift in market sentiment towards rate cuts in a short period of time is rare. But it's not surprising that the market is so focused, as the depth of the rate cut will directly impact the market. According to Subadra Rajappa, Head of US Rate Strategy at Societe Generale, if the Fed cuts rates by 25 basis points instead of 50, the market reaction will be much stronger, and statements such as position adjustment, optimistic sentiment, and looser financial conditions 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.

Key sectors & stocks

Growth tech stocks showed mixed performance, with Apple rising more than 1%, Broadcom, Tesla, Taiwan Semiconductor, and Nvidia rising slightly; Oracle, Adobe, Microsoft, AMD, Micron Technology, and others fell slightly.

Space concept stocks $Intuitive Machines (LUNR.US)$ rose nearly 50%, and the company received a near-space network contract worth as much as $4.82 billion from NASA(National Aeronautics and Space Administration).

$Odyssey Marine Exploration (OMEX.US)$Rising by over 125%, the stock plummeted nearly 90% yesterday. The company received a $37 million compensation in the North American Free Trade Agreement arbitration.

$United States Steel (X.US)$ Up nearly 4%, the CEO of the company expressed confidence that the acquisition deal will ultimately receive approval from the US government.

Editor/rice