16/09/2024

Next Wednesday, September 18, the Federal Reserve will begin its cycle of interest rate cuts. Given that a rate cut is already a certainty, the only unknown is the size of the initial reduction, which could be either 0.25% or 0.50%. Communications from various participants and reports in the press suggest that Fed members are divided over the magnitude of the cut.

However, an initial cut of 0.25% appears somewhat more likely, especially considering the slight upward surprises in August's inflation data.

Similarly, recent speeches by Federal Reserve members generally did not indicate any urgency for a larger cut. However, according to recent reports in some financial newspapers, the Fed members have not yet decided on the size of the cut. Currently, the odds of a 0.5% cut are a notable 43%, despite such a significant move being almost ruled out after the release of the August inflation data.

In short, anything can happen. Also, we must consider a second factor of uncertainty: the market's reaction to the Fed's decision, which could be either very positive or very negative.

For instance, if investors interpret a 50 basis point cut as the Fed's determination to stay ahead of the market and decisively pursue monetary easing, the reaction is likely to be positive. Conversely, if investors sense that this decision stems from a more significant economic slowdown than anticipated, a market correction would be inevitable.

Similarly, a cut of 25 basis points could be interpreted both positively and negatively. The market might perceive that the Federal Reserve is not overly concerned about economic growth and does not see the need for a rapid rate-cutting process. However, there could also be fears that the Fed may not moderate monetary tightening in time to prevent the economy from sliding into recession.

As we can see, any outcome is possible heading into the Fed meeting, and we believe there is little point in trying to predict it. That said, it's clear that the market is eager to continue its rally, as evidenced by the rapid stock market recoveries in August and September. If our baseline scenario of a soft economic landing materializes, we believe that financial asset prices will remain well supported in the latter part of the year. This could be particularly favorable for more conservative investors.