On September 17th local time, the two-day Federal Reserve monetary policy meeting officially kicked off in Washington.
Following the release of the August Consumer Price Index (CPI) last week, the Fed's interest rate cut initially pointed towards 25 basis points.
However, market pricing then underwent a sudden change, which is not unrelated to the "whisper" reported by various media outlets.
As of the time of writing, the probability of a 50 basis point rate cut remains around 65%, and the suspense continues.
Now, the Fed is facing a complex situation.
Against the backdrop of easing price pressures and fluctuations in the labor market, whether there is a need to take preemptive action to reduce the risk of economic recession is expected to be one of the focal points of discussion at this meeting.
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Last month, Federal Reserve Chairman Powell delivered a much-anticipated speech on the economic outlook of the United States at Jackson Hole, and sent the clearest message so far that the time for policy adjustment has come.
"As we make progress on price stability, we will do everything we can to support a strong labor market.
By appropriately easing policy constraints, we have good reason to believe that the economy will return to a 2% inflation rate while maintaining a strong labor market."
Since the second half of the year, the trend of cooling inflation in the United States has continued, with the CPI rising by 2.5% year-on-year in August, a new low since 2021.
Due to the rebound in rent and service prices, the stickiness of core inflation also seems to indicate that the path to the medium-term target may not be smooth sailing.
At the same time, the pace of hiring by U.S. companies has recently slowed down, the number of job vacancies has continued to fall, and the difficulty and time for job seekers to find work have increased compared to before.
The recent loosening of the job market has been noticed by the Fed and is also seen by many institutions as an early warning signal of a recession, which has raised concerns about whether the U.S. economy can achieve a soft landing.
First Financial Daily reporters found that although Fed officials generally made a case for a rate cut before the quiet period, the traditional starting point of 25 basis points seems to be more favored.
San Francisco Fed Chairman Mary Daly warned earlier that it is "extremely important" not to let the labor market fall into a recession, and if this situation begins to happen, it will be necessary to take more aggressive action.
An indicator closely followed by Daly shows that so far, the cooling of the labor market has been driven by a slowdown in hiring, not an increase in layoffs.
However, market pricing experienced an unexpected reversal last weekend.
The latest federal interest rate futures pricing shows that the market expects a 65% probability of a 50 basis point rate cut by the Fed.
Nick Timiraos, known for "forecasting" a 75 basis point rate hike in June 2022, said that the Fed faces a tough decision, with the probabilities of a 25 basis point or a 50 basis point cut being evenly matched.
The Fed is increasingly worried about keeping interest rates at too high a level for too long, causing a loss of control over a soft landing.
Subsequently, the remarks of former New York Fed Chairman Dudley also attracted attention.
"I think there is a good reason for them (the Fed) to cut rates by 50 basis points, whether they do it or not," said Dudley, who believes that the current interest rates are 150-200 basis points higher than the so-called neutral rate that is neither restrictive nor easy for the economy.
"So the question is: 'Why don't you start acting?'"
Institutional views are also divided.
The Atlanta Federal Reserve Bank's GDPNow model predicts that the third quarter will achieve a robust growth of 2.5%, and the Fed seems to have no specific reason to start this easing cycle with aggressive measures.
Capital Economics said, "Recent history has shown that a 50 basis point rate cut is often associated with a more challenging economic environment than today."
"I hope they cut by 50 basis points, but I guess they will cut by 25 basis points," said Mark Zandi, Chief Economist at Moody's Analytics.
"They have already achieved the task of full employment and the return of inflation to target, and a fund rate of around 5.5% is too high.
Therefore, I think they need to normalize interest rates quickly, and there is a lot of room to do so."
Attention to the direction of the dot plot has been a focus since the end of the rate hike in the second half of 2023 and the Fed's maintenance of interest rates at a high level since the century began, preparing for the first rate cut since March 2020.
It is worth noting that the Fed's decisions at the end of each quarter are often more eye-catching, as the outside world will get the latest economic forecasts and dot plots, which help investors and institutions find clues for future monetary policy.
Fed policymakers will reassess their policy responsibilities through two tables, including inflation, labor market, GDP growth, interest rate path, and consider factors such as corporate or household financial conditions, potential policy errors, etc.
Boris Schlossberg, a macro strategist at asset management firm BK Asset Management, said in an interview with First Financial Daily that recent economic data has been mixed, but there has been no cliff-like decline.
Overall, the job market is slowing down, and although inflation is still falling, the pace in the future will also slow down.
In his view, this economic forecast will show that some inflation and unemployment rate indicators will be slightly raised, but growth forecasts may be lowered.
On the other hand, Schlossberg analyzed that the direction of the dot plot will attract more attention from the outside world, which also reflects the views of the committee on the economic outlook.
He tends to believe that the Fed will continue to avoid clear path guidance, emphasize data dependence and potential risks, and retain policy options.
He believes that the current problem is that the next meeting will be in November, and there may be unexpected situations during this period, causing a slow policy response.
The Fed can certainly convene an emergency meeting, but the damage may have already been done, which is also the reason for their hesitation.
Many market views believe that aggressive rate cuts will allow monetary policy to leave the tightening state more quickly, but it may also send a panic signal about the health of the economy.
Regardless of the size of the first rate cut, the subsequent policy path will be more important than the size of the first action.
Federal funds futures also show that investors currently expect the Fed to cut rates by more than 110 basis points within the year, which means that there may be two 50 basis point rate cuts in the next three meetings.
Goldman Sachs economists summarized the last public remarks made by Fed officials on monetary policy before the September meeting, saying, "The Fed leadership believes that the basic situation of the September meeting is to cut rates by 25 basis points, but if the labor market continues to deteriorate, the Fed can cut rates by 50 basis points in subsequent meetings."
Wells Fargo predicts that at the September FOMC meeting, the federal funds rate will be cut by 25 basis points, followed by two 50 basis point rate cuts at the FOMC meetings in November and December.
Citibank's view is similar, and the bank's economist Andrew Hollenhorst believes that the labor market will be the most important issue for policymakers, expecting a 125 basis point rate cut this year, with 50 basis point rate cuts in November and December.