The debate between a 25 or 50 bps cut doesn't matter. Here's why.
Traders are pricing in an 85% chance of a 25 basis-point interest rate cut from the Federal Reserve in September after the latest Consumer Price Index (CPI) report came in mostly in line with expectations. Wells Fargo Investment Institute senior global market strategist Scott Wren joins Morning Brief to discuss the Fed's rate cut path ahead.
"We had been in the room certainly looking for 100 basis points in cuts in these three meetings. A month ago, we would have said they would have done 50 here in September. But I think the fed funds futures are right. The chances are is that it's going to be a 25-basis-point cut; things like today's CPI data suggest that the Fed can go at an even pace," Wren tells Yahoo Finance.
He notes that the market is "a little bit nervous," highlighting that when looking at the fed funds futures yesterday, the market priced in more than 10 cuts by the end of 2025. "I think that's too aggressive. I think the economy would really have to tank to see something like that. We're expecting a soft landing. We're not looking for a recession. So, you know, the market's going to be very sensitive to this," he explains.
While there's still some debate about a 25- or 50-basis-point cut, Wren believes the exact amount doesn't really matter. Instead, he believes that what matters most is the fact that the Federal Reserve initiates the first of a series of cuts at its September meeting. "In the whole scheme of things, we're gonna have a lot of cuts here and I don't think that investors should get too hung up on whether the first one is 50 or 25," he says.
Wren argues that the neutral rate should sit around 4%, adding, "our theory is that they do want to get to neutral and that they're going to get there relatively slowly." While he would like to see 100 basis points over the last three meetings of 2024, he believes the market will definitely see at least 75.
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This post was written by Melanie Riehl