Fed rate cut size and market reaction: why 25bps beats 50bps or 75bps
Quote441 words
Argues a 25bps cut is the bullish outcome while 50bps or 75bps risks being read as panic over a recession. Cites historical panic cuts as negative at 1 and 3 months but positive at 6 and 12 months.
Key claims
Expectations shifted from 87% for a 25bps cut to 67% for 50bps within five days
Panic cuts historically produced negative returns at 1 and 3 months
Author favors a 25bps cut
5 days ago, market expected a 25bps rate cut by the Fed tomorrow with 87% probability according to CME's Fed Watch.
Today, expectations are at 67% for a 50% cut after US senators demand 75bps cuts in letter to Powell.
What does it mean? Is this bullish?
Personally, I believe no.
25bps is bullish, 50bps is worrisome and 75bps means we're f**ked.
Why?
The economy has been notably cooling down.
A weakening labour market and cautious consumers gave rise to recession fears in the US over the past months.
Overall, the economy is still in a comparably decent state though and especially certain sectors are still doing well.
That's a notable difference to most other policy pivots in the past that led to a series of rate cuts (which is likely to happen here too).
By cutting rates, the Fed will take some pressure off the economy, which could re-ignite more optimism in the markets.
With more rate cuts coming up in the next months, this could lead us into a bullish scenario, where risk assets such as tech stocks and crypto see increased inflows again.
However, a cut of 50bps or even 75bps would basically be admitting that the Fed policy has been too strict so far, leading to issues that demand drastic action.
The market could take this as a panic reaction and the confirmation of the recession everyone fears.
Blackrock however still says that the cut will likely not be as big as the market expects, hinting at a 25bps cut, which is also my favoured outcome.
As I expect the Fed to be cautious with regards to the looming inflationary pressures in the economy, it's also still what I believe is the likely outcome.
Very curious to see how the market perceives tomorrow's decision.
Have seen many people call a larger cut "bullish".
Larger rate cut = larger economic boost.
While that's true, it doesn't mean that markets will run on those news though.
Historically, "panic cuts" have mostly led to significantly negative performance after the announcements, especially on the shorter timeframes (e.g. 1 month or 3 months).
Once the "economy was fixed", markets started to recover and performance turned positive (e.g. 6 months, 12 months).
Different macro environment this time, but would still prefer the Fed to be cautious, as I believe that the recession fears are at least partially overblown (and they won't led the economy and/or markets die ahead of election).
Expect a lot of volatility in the days and weeks to come though, especially amid the presidential election in the US.
DYOR and stay safe.
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Where are the markets going from here? It's a big week for macro. First, we had the Trump vs. Harris debate impact election odds. Yesterday, US inflation data was released. Ready for the Fed Rate Cuts next week? Macro Alpha 馃搳猡碉笍 CPI is up 0.2% MoM in August, the same as in
Where are the markets going from here? It's a big week for macro. First, we had the Trump vs. Harris debate impact election odds. Yesterday, US inflation data was released. Ready for the Fed Rate Cuts next week? Macro Alpha 馃搳猡碉笍 CPI is up 0.2% MoM in August, the same as in
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What came next 路 since 17 Sep 2024
Since then
Zero has written 3 more pieces on Federal Reserve since this one.
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