Fed Keeps 50bps Cut Option Ready as Economy Shows No Need for Rescue

The Federal Reserve is expected to consider a 50 basis point rate cut option as the economic slowdown intensifies, according to analysts at Capital Economics. In a note ahead of the Fed’s meeting on September 18, the analysts suggested that policymakers may prefer to keep this option available.

While market speculation regarding a 50 basis point cut at the upcoming Federal Open Market Committee (FOMC) meeting has slightly decreased, the likelihood of more significant cuts in future meetings has increased based on communications from Fed officials.

Fed Governor Christopher Waller, in prepared remarks delivered at the University of Notre Dame on September 6, expressed his support for substantial rate cuts if economic data indicates their necessity. Waller, who previously advocated for preemptive rate hikes during the inflation surge in 2022, emphasized that he would also support front-loading rate cuts when appropriate.

Recent mixed and weaker economic data from the U.S., along with sharp declines in equity markets, have revived discussions around the so-called “Fed put,” a term referring to the Fed’s tendency to intervene during economic downturns.

However, analysts note that the overall economic context and financial market conditions make it challenging to justify the rapid and aggressive responses traditionally seen during previous downturns.

Current market expectations are pricing in a total of 125 basis points in rate cuts by the end of the year. The analysts highlighted that a “significant further deterioration in economic data or financial stability” would be necessary to validate the current pace of monetary policy easing anticipated by market participants.

At its meeting in July, the Fed indicated plans for one rate cut this year, with the upcoming FOMC meeting set to provide an updated economic outlook along with its rate decision.