Price Action Shows Market Leaning Toward a 50 bps FED Rate Cut

Shift in Market Expectations for the FED Rate Odds

JP Morgan has reaffirmed its call for a 50-basis-point rate cut on Wednesday. The market odds shifted sharply after an article by Nick Timiraos, often viewed as a “Fed insider,” highlighted the central bank’s dilemma. Earlier in the week, the chances of a larger rate cut were just 20%, but following the report, odds shifted to nearly a 50-50 split, reflecting heightened expectations that the Fed may opt for a bigger reduction in rates to avoid economic headwinds.

US Inflation Data Signals Decline

Inflation data has been a critical driver behind this change in outlook. On Friday, the University of Michigan (UoM) price index, along with headline inflation figures, indicated that inflation is continuing to decline, though core CPI and PPI remain somewhat sticky. Analysts are now projecting a core PCE increase of only 0.13%–0.17% for the month, which signals a cooling in inflation—a key reason for the growing belief that the Fed should act more decisively by cutting rates significantly.

Former Fed Officials and Analysts Weigh In for Larger Interest Rate Cut

The debate over the size of the cut has also drawn input from former Federal Reserve officials. Both Dudley and Mester have publicly expressed support for a more aggressive approach, with Mester indicating he would be open to a 50-basis-point cut and Dudley openly backing it. Meanwhile, Goldman Sachs continues to forecast a 25-basis-point cut at next week’s meeting but expects additional cuts of 25 basis points each in November and December, reflecting more gradual easing.

Notable Investor Perspectives

Prominent investor John Paulson, who made his fortune by correctly predicting the 2008 housing market crash, is another voice advocating for a 50-basis-point rate reduction. He, along with other influential figures in the financial world, believes that a larger cut is necessary to provide a stronger buffer against economic slowdown, especially in light of the weakening inflation data and signs of slowing growth in various sectors. This perspective aligns with broader market sentiment, as investors continue to watch closely for the Fed’s next move, which could have lasting impacts on both equities and fixed-income markets.