On the eve of the Federal Reserve interest rate decision, the market forecasts an "unprecedented" divergence
On the eve of the Federal Reserve interest rate decision, economists and the market are experiencing an unprecedented divergence in views on interest rate adjustments. Traders have varying expectations for the rate cut, with data showing a 55% chance of a 50 basis point hike. Multiple economic reports have failed to quell the debate, as policymakers are still deciding on the extent of the rate cut amid concerns about slowing inflation and the labor market. Some economists support a 50 basis point cut, and there is significant uncertainty in the market's expectations for future policies
ZhiTong Finance APP noticed that on the day before the announcement of the interest rate decision by the Federal Reserve, there was an "unprecedented divergence" in the views of economists and the market on how the Federal Reserve would adjust interest rates.
Traders have different opinions on the expected rate cut on Wednesday. The unexpectedly strong August retail sales data released on Tuesday showed that the probability of traders expecting a half percentage point rate hike is about 55%. Weaker data such as the August employment report indicated a significant slowdown in US hiring, with the unemployment rate rising to 4.3%, the highest in nearly three years.
Jim Bianco of Bianco Research stated on Tuesday, "Usually, on the day before the meeting, these probabilities are either 95%-100% or 0%-5%. Therefore, this level of uncertainty is unprecedented."
Recent economic reports, mainly the August Consumer Price Index report, failed to quell the debate on the rate cut magnitude. Policymakers are considering inflation cooling and a slowdown in the labor market when deciding on the next step for the 5.25%-5.5% benchmark interest rate.
Bianco also mentioned that out of 118 Wall Street economists, 101 expect a 25 basis point rate cut, 13 expect a 50 basis point rate cut, and 4 predict no change.
Bianco said, "I can't find another example on Wall Street where there is such a divergence in pricing on the day before the meeting."
Federal Reserve policymakers are still deciding on the rate cut magnitude, increasing the possibility of a 50 basis point rate cut.
Economists at Morgan Stanley also support a 50 basis point rate cut. Michael Feroli, the chief US economist at the bank, stated last week that the Federal Reserve should "cut the policy rate by 50 basis points to adapt to the evolving risk balance."
Jeffrey Gundlach, also known as the new bond king, has started betting that the Federal Reserve will kick off its rate cut cycle with a half percentage point cut on Wednesday.
Gundlach believes that the Federal Reserve should make up for this gap. He bets that the Federal Reserve is likely to cut the benchmark interest rate by 50 basis points on Wednesday and a total of 125 basis points by the end of the year. He believes that the US economy is already in a recession, and the Federal Reserve has maintained a tight policy for too long.
"I think they will cut rates by 50 basis points - it looks outrageous," "The Federal Reserve is far behind the situation, they should take consistent action."
He stated that he gives the Federal Reserve an F rating and added that the Federal Reserve should have cut rates earlier.
Gundlach said, "We are already in a recession. I see a lot of layoff announcements."