As the FOMC starts today (decision on 17th Sep, Wednesday), consensus is for a 25bp rate cut this month and a further two more cuts by Dec'25-Jan'26. The forward path, their guidance will be as critical as the decision itself. While the probability of a larger 50bp cut has progressively diminished, we ask the question "what if they did cut 50bp?", not dissimilar to a 50bp cut in Sep'24, although probability was higher then, but not a slam dunk even then.
First, why should/ would they consider a larger quantum of easing. Recent statements (notably at Jackson Hole) have suggested a FED more concerned about the jobs market and seemingly more comfortable with inflationary pressures. Recent jobs data would have added to those concerns.
Next is how markets may interpret such an outcome, even if its a low probability event. While a monetary stimulus would be welcome, we see a larger cut confirming the worst of market fears and would expect equities to sell-off, should a 50bp cut be delivered. Who gains? We believe, in most scenarios, long-dated treasuries and Gold would be clear gainers - a larger cut will likely see a spike while a 25bp rate reduction accompanied by guidance of further cuts will extend the recent rally in treasuries and Gold.
- FED Probabilities - Futures price in a 25bp cut in Sep'25 with 96% probablity and two additional cuts with near certinty by Jan'26. Guidance post the decision will be as critical.
- FED's Dual Mandate - Up until recently the FED's been more concerned with inflationary pressures, especially with uncertainty around tariffs. More recently, at the annual Jackson Hole summit, the FED clearly pivoted to labor market risks. As if on cue, data releases since then (payrolls and revisions to these) - see charts below.
- Possible Market Reaction to a Bazooka- While a larger monetary stimulus will be eventually positive, a 50bp cut would most likely be interpreted as economic weakness much worse than current expectations, resulting in an equities sell-off. At the same time, we would likely see a spike in both Gold and long-dated treasuries.
Gold - Inverse Moves to Interest Rates
FED Futures pricing in a 25bp Rate Cut in Sep'25
Payrolls Weakening
Unemployed Persons now Exceed Job Offers...
...and It's Harder to Find Jobs...
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