After Federal Reserve Chairman Jerome Powell all but confirmed that a rate cut was imminent, market attention quickly turned Friday to the question of when and by how much. Traders continued to price in a greater likelihood that the Fed will kick off what is expected to be a lengthy easing campaign in September with a quarter-percentage point, or 25 basis point, cut. But the odds of an even more aggressive move, such as a half-percentage point, rose quickly to about 1 in 3, according to prices in the 30-day Fed funds futures market, as measured by CME Group’s FedWatch. Market participants believe this is especially likely if the August employment report, due to be released on Sept. 6, turns out to be a repeat of July’s weaker-than-expected reading. The Fed’s next meeting begins less than two weeks later, on Sept. 17. “My base case is that we’re on a path of 25 basis points of cuts, probably for the next eight meetings, a couple hundred basis points in total,” economist Paul McCulley said on CNBC’s “Squawk on the Street.” “But if we see weaker growth and particularly weaker jobs, then I think we could pull something forward and start the process with 50 basis points of cuts.” “I don’t think that’s the base case yet, but he’s clearly opened the door to pulling forward the easing process, just like he pulled forward the tightening process,” added McCulley, a former managing director at Pimco and now a senior fellow at Cornell and associate professor at Georgetown. Powell’s highly anticipated speech at the Fed’s annual symposium in Jackson Hole, Wyoming, provided clear indications that a rate cut is on the horizon. “It’s time to adjust policy,” the Fed chief said. Arguments for a half-point cut However, he was less direct about the timing and pace of the cuts, leaving the market to guess how far the Fed under Powell is willing to ease. But several statements from the chair seemed to indicate a trend toward faster action, especially if labor market conditions continue to deteriorate. “We are not seeking, nor do we welcome, a further slowdown in labor market conditions,” Powell said. That and other promises to support the economy now that inflation has eased suggested a 50 basis point cut is at least up for debate. The Fed’s benchmark interest rate, which influences much of the other interest rates consumers pay, is now targeted in a range between 5.25% and 5.5%. Markets expect the central bank to cut a full percentage point this year and at least that much in 2025. “It seems to me that the 50 percent rule gives the Fed more choice,” said Joseph LaVorgna, chief economist at SMBC Nikko Securities. “If you’re going to come up with a 25-25-25 ratio for September, November and December, why don’t you just do 50? You know you have to cut rates. If things get better, that’s fine. Why wait?” Jobs report crucial In separate CNBC interviews on Friday, regional presidents Raphael Bostic of Atlanta and Austan Goolsbee of Chicago did not commit to a specific easing strategy but suggested cuts were imminent. “The numbers are starting to move in a direction that suggests our policies have had their effect and we can start down the path to (a return) to normal policy,” Bostic said. “Look, we can’t wait until inflation is at 2% to move. Inflation has come down significantly, which tells me we really need to think hard about this.” Attention now turns to the August jobs report, due in two weeks. Another weak reading like in July, when only 114,000 jobs were added and the unemployment rate rose to 4.3%, could well prompt the Fed to agree to a half-percentage-point increase. Conversely, signs of a strengthening labor market are unlikely to dissuade the Fed from cutting, but would virtually guarantee a quarter-percentage-point increase. Powell’s comment that the “direction of movement is clear” signaled both a rate cut and that “the door is open for a 50 basis point hike to bring the fed funds rate closer to a level that is still hawkish relative to today’s economic and inflationary conditions,” Rick Rieder, CIO of BlackRock’s global fixed income team, said in a note to clients. “We think the Fed should cut the fed funds rate more quickly to a 4% rate as that would be more in line with current economic and inflationary conditions that would require a 50 basis point hike over the next few meetings,” he added. “The data would have to open up the possibility of that in the Fed’s current thinking.” Correction: Austan Goolsbee is president of the Federal Reserve Bank of Chicago. An earlier version misstated the location.
Markets are now wondering whether the Fed could cut interest rates by half a percentage point in September
