With Federal Reserve Chairman Jerome Powell confirming that a rate cut is imminent, market attention quickly shifted Friday to when and by how much. Traders continued to price in a greater likelihood that the Fed would begin what is expected to be a lengthy easing campaign in September with a quarter-point, or 25 basis points, cut. However, the odds of something more aggressive, such as a half-point move, have grown rapidly and are now about a 1-in-3 chance of happening, according to pricing in the 30-day Fed funds futures market as measured by CME Group’s FedWatch. Market participants see the opportunity as particularly likely if the August jobs report — due out Sept. 6 — proves to be a repeat of the weaker-than-expected reading in July. The Fed’s next meeting is less than two weeks away, on Sept. 17. “My base case scenario is that we’re on a 25-basis-point ride, probably for the next eight meetings, a couple hundred basis points in cumulative,” economist Paul McCauley said on CNBC’s “Squawk on the Street.” “But if we see weaker growth, and particularly weaker jobs, I think we could start the process with a 50 basis point cut,” said McCauley, a former managing director at Pimco and now a senior fellow at Cornell University and adjunct professor at Georgetown University. “I don’t think that’s the base case yet, but it’s clearly opened the door to front-loading the easing process, just as front-loading the tightening process has opened the door,” added McCauley, a former managing director at Pimco and now a senior fellow at Cornell University and an adjunct professor at Georgetown University. Powell’s much-anticipated speech at the Fed’s annual symposium in Jackson Hole, Wyoming, provided clear signals that a rate cut was on the cards. “It’s time to adjust policy,” the central banker said. The argument for a half-point cut, however, was less direct about the timing and pace of the cuts, leaving the market to guess how much the Fed might be prepared to ease. Still, several of the president’s comments seemed to suggest a bias toward faster action, especially if the jobs picture continues to weaken. “We do not seek or welcome further easing in labor market conditions,” Powell said. That, among other pledges to support the economy now that inflation has eased, offered some indication that at least a 50 basis point move is on the table. The Fed’s benchmark borrowing rate, which influences a wide range of other rates consumers pay, is now targeted in a range of 5.25% to 5.5%. Markets expect the central bank to cut a full percentage point this year and at least that much in 2025. “It just seems to me like the Fed is getting more options by doing 50,” said Joseph LaVorgna, chief economist at SMBC Nikko Securities. “If you’ve planned for what you thought would be 25-25-25 in September, November and December, why not start with 50? You know you’re going to have to cut rates. If things turn out better, that’s fine. Why wait?” Jobs report key In separate interviews with CNBC on Friday, regional presidents Raphael Boucek of Atlanta and Austan Goolsbee of Chicago did not commit to a specific easing strategy, though they indicated that cuts were coming. “The numbers are starting to move in a direction that suggests our policy has had an effect, and we can start the path (back) to normal policy,” Boucek said. “Look, we can’t wait for inflation to get to 2% itself to start moving. Inflation has come down significantly, so that tells me we really have to think seriously about that.” Attention now turns to the August jobs report, due in two weeks. Another weak reading like July’s, which saw jobs gain of just 114,000 and the unemployment rate rise to 4.3%, could push the Fed to agree to a half-point hike. Conversely, signs that the labor market is strengthening are unlikely to stop the Fed from cutting, but they would virtually guarantee a quarter-point move. Rick Rieder, chief investment officer of BlackRock’s global fixed income team, said in a note to clients that Powell’s comment that “the direction of travel is clear” signaled a rate cut and that “the door is open for a 50 basis point move to move fund rates closer to a level that is still relatively constrained by current economic and inflationary conditions.” He added: “We believe the Fed should cut rates to 4% sooner because it would be more consistent with current economic and inflationary conditions, which would warrant a 50 basis point move over the next two meetings.” “The data should open the door to that in the Fed’s current thinking.” Correction: Austin Goolsbee is the president of the Federal Reserve Bank of Chicago. The previous version misstated the location.
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Markets are now wondering whether the Federal Reserve might cut interest rates by half a point in September.
