The Fed has three options ahead of it. Here is the difference between them
The Federal Reserve enters the meeting next week with three choices, each of which has its advantages and disadvantages.
Politicians can either choose to keep interest rates stable, cut by half or half a point. Raising interest rates is not an option and may not have been for several years.
Markets indicate they have found out: The Federal Open Market Committee is likely to cut a quarter point, with a small chance of half-point reduction. There is virtually no chance of staying steady, even though two regional Fed presidents have recently said that is exactly what the committee should do.
With the Fed currently linking its daily fund rate in a range between 2.25% and 2.5%, here is the difference between each move, especially what a 50-point cut would mean as opposed to a 25-point cut :
Quarter Point: The Most Likely Case
Judging by Statements Fed officials have come in the last few days, there is some support for implementing a more aggressive 50-point relief. But the 25-point move seems more likely simply because the post-financial crisis Fed has been one to favor incrementalism rather than radical political moves.
In short, the lower reduction will be an easier sale.
"Although you can certainly build the case for a stronger act, a cut of 50 basis points, I just think it will be hard to get everyone on board with it," said Curt Long, chief economist of the National Association of Federally Insured Credit . unions. "Are we on the edge of a recession? If you are, 50 basis points are sensible. But I don't think the majority of the Fed feels that way."
The reduction can actually come down to what kind of message the Fed wants to send.
The lower alternative may simply be a way to undo the damage caused in December when the Fed approved a 25-point increase, despite a tumbling stock market and fear of tariffs and a global downturn. A 50-point increase, on the other hand, may signal something more serious, such as fear of a more fundamental decline in growth.
"The Fed made a political mistake last year," said Quincy Krosby, chief market strategist at Prudential Financial. "It's hard to think that they don't come in at 25 basis points at a minimum because [Chairman Jerome Powell] will have a lot to explain if they don't."
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Going to the half point move offers a number of benefits, said Joe LaVorgna, chief economist for America at Natixis.
"It gives the Fed more opportunity in the sense that the Fed may be able to break market expectations back in a more balanced way," he said. "One way to break them down is to make it a bigger move than expected in July and then wait, in fact, to be data-dependent. You draw back a little more insurance and sort of breakthrough in market expectations. They may be less dead, they can be more balanced if they move 50. "
Markets that are aggressively priced in the more dramatic cut during a brief move Thursday, triggered by a speech by New York's Fed President John Williams. The influential official said in a speech that the Fed should act swiftly and vigorously when it seems that the economic headwind is building, and commenting on the market to mean that a 50 basis point cut would come.
But a Fed spokesman quickly returned the comments and said Williams spoke only theoretically and not in a way to be interpreted as a political intention.
"By going to cut more, hopefully you're done," LaVorgna said. "If the economy is okay and weakens the storm, you're done. The more drip, drip, drop, let's wait and see and do things at a meeting after the meeting. Fifty get you out."
He added that the move would help reverse an inversion of the yield curve that saw short-term returns, especially in the feed fund rate, move higher than the 10-year Treasury, formerly a classic downturn.
Keep the line
Market-implied opportunity for not changing courses is zero and has been there for several weeks. It does not mean that there is no support for FOMC to keep patting. Boston Fed President Eric Rosengren told CNBC on Friday that interest rates do not have to change, and Kansas City Fed President Esther George made similar comments recently to the Wall Street Journal.
Fed officials have quit the case citing the US and China customs struggle, slowing global growth and low inflation, among other concerns.
But there is absolutely nothing that is obvious in the economic signals that point to a need for more relief. The stock market is all about record high, economic growth in the second quarter is likely to be around 2%, and the consumer seems to be on solid ground.
"Why is [a rate cut] convincing now that incoming data has been pretty solid and trading conversations with China are starting again? I think that's a good question," said Bill English, a 20-year-old Fed veteran and now professor at Yale School of Management. "Assuming they've cut interest rates at this meeting, I think Jay [Powell] will have to explain what has changed from June that made them want to take this step."
English expects Powell to repeat the concerns of China, inflation and softer investment spending. which can weigh the economy forward.
"Some of these three reasons may lead the day to different members of the committee," he said. "The communication around political decisions will be very important … It is an interesting time and should be an interesting meeting. Almost more interesting will be the communication around the decision. It will help explain where the committee comes from."
