Investors are awaiting a potential Federal Reserve rate cut next week. Two key inflation reports — August's Consumer Price Index (CPI) and Producer Price Index (PPI) — both suggested a possible 0.25% reduction. However, Wall Street remains divided on whether the Fed will implement a 25 or 50 basis point cut. FedWatch Advisors Founder & CIO Ben Emons joins Morning Brief to share his outlook on monetary policy.

Emons explains that "the reality" is the Fed needs to lower rates. "Traditionally," he notes, they will take a conservative approach with a 25 basis point cut. However, he adds, "the probability of a 50 [bps cut] is still over 50 percent." Emons points out that the "real" fed funds rate, accounting for inflation, has risen "almost by 100 basis points" since the beginning of 2024. Despite rate cuts being priced in, he argues, "Technically speaking, they should be able to cut by 50 or even 75 basis points just on that real fed funds rate tightening." Though, he thinks they will cut by 25 given Wall Street expectations.

Addressing concerns that the Fed is behind the curve on cuts, Emons suggests, "If they go for 50, it probably will be a very mixed reaction, if not slightly negative." Nevertheless, he emphasizes, "The Fed has room to cut."

"Let's face it, we don't have a recession scenario currently unfolding in any sort of way. All the data doesn't indicate the recession is right here right now, so the Fed can lower rates. It's more about how quickly you want to get to neutral," he told Yahoo Finance.

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This post was written by Angel Smith