At 02:00 AM on September 19th Beijing time, the Federal Reserve will announce its latest interest rate decision.
The market anticipates that the Fed will officially conclude its multi-year tightening monetary policy.
However, there is still no consensus on the extent of the rate cut.
As signs of a slowing labor market emerge and inflation drops to the Fed's 2% target, the market has inclined to price in a 50 basis point rate cut by the Fed.
Yet, considering the fundamental factors of the U.S. economy, it remains highly likely that the Fed will initiate this round of rate cuts at a pace of 25 basis points.
The day before the rate decision, the market is still rife with debate over what actions the Fed will take.
The latest CME "FedWatch" indicates a 37.0% probability for a 25 basis point cut in September, and a 63.0% probability for a 50 basis point cut.
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Economic data still maintains a solid foundation.
Retail sales data released earlier this week alleviated concerns over a significant slowdown in the U.S. economy.
The data showed that U.S. retail sales in August recorded a 0.1% increase, higher than the expected 0.2% decline, suggesting that the U.S. economy remains on a solid foundation for most of the third quarter.
Scott Helfstein, Head of Investment Strategy at Global X, said that after the better-than-expected retail sales in August, the Fed is likely to take note of the continued strength of consumers.
In recent months, retail sales growth has been slightly below the long-term average but is still growing at a moderate pace.
The U.S. unadjusted Consumer Price Index (CPI) for August was 2.5% year-over-year, falling for the fifth consecutive month, reaching the lowest level since February 2021, and lower than the market's expected 2.6%.
Analysts pointed out that although the decline in the overall CPI year-over-year rate brought a bit of optimism to the market, the stable performance of the core CPI still keeps the market vigilant about the inflation outlook.
In particular, the core CPI month-over-month rate rose to 0.3%, higher than expected, which may increase market concerns about stubborn inflation.
In August, the U.S. added 142,000 non-farm jobs, slightly lower than expected, but an improvement from the July data; the unemployment rate fell to 4.2%, in line with expectations, marking the first decline after four consecutive months of increase, with the previous rate at 4.3%.
In addition, the non-farm jobs added in June were revised from 179,000 to 118,000; the non-farm jobs added in July were revised from 114,000 to 89,000; after revision, the combined job additions in June and July are 86,000 less than before the revision.
Some analysts believe that the revision of non-farm data may be related to the recovery speed of small businesses, which are more sensitive to changes in economic conditions and may add jobs faster during economic expansion, and reduce jobs more quickly during economic recession or when the risk of recession increases.
The extent of the first rate cut remains uncertain.
On Monday, traders increased their bets on a 50 basis point rate cut by the Fed this week.
A strategist said that the impact of a larger rate cut on the outside view of the Fed may be greater than its impact on the economy itself.
Because investors may believe that the Fed's concern about economic recession is higher than it previously suggested.
According to industry-compiled data, the number of open contracts for October federal funds futures used by investors to bet on this week's Fed meeting has soared to the most extreme level since the derivative was introduced in 1988.
And most of these new bets are on a 50 basis point rate cut this month.
Renowned financial journalist Nick Timiraos, known as the "New Fed Mouthpiece," wrote that the Fed is about to cut rates, but the extent of the first rate cut remains uncertain.
The Fed usually prefers to act in increments of 25 basis points, but this time, the situation has become complicated.
The Fed's benchmark interest rate is currently at 5.25%-5.5%, the highest level in 20 years.
The Fed is expected to start cutting rates this Wednesday, with the aim of maintaining a stable job market amid cooling inflationary pressures.
Most Wall Street analysts believe that the Fed's first step in rate cuts will be more cautious.
Ipek Ozkardeskaya, an analyst at Swissquote Bank, said in a report: "I still firmly believe that a 25 basis point rate cut would be the best choice due to the current economic data not being alarming.
However, the Fed may want to avoid the market's disappointment with a 25 basis point rate cut, and some Democrats calling for a 75 basis point rate cut are adding fuel to the fire."
Steve Englander, Head of Global G10 FX Research and North American Macro Strategy at Standard Chartered Bank in New York, said that recent U.S. economic data has not provided a convincing reason for a 50 basis point rate cut at the upcoming FOMC meeting.
A 50 basis point rate cut with a policy mistake could be worse than a 25 basis point rate cut with a policy mistake.
The reason for a 25 basis point cut is that the upcoming inflation data does not support inflation approaching the 2% target quickly.
At the same time, the recent rise in unemployment also shows a worrying deterioration in the economy.
Seema Shah, Chief Global Strategist at Principal Global Asset Management, said in a report that although some may think the Fed will cut rates by 50 basis points this week, history shows that it is more likely to be 25 basis points.
"Since the late 1980s... a 25 basis point cut has become the norm, and a 50 basis point cut is the exception."
She said that only twice has the beginning of a rate cut cycle been more than 25 basis points: in January 2001 during the internet bubble and in September 2007 during the subprime crisis.
Both periods were prominent, characterized by concerns about severe asset price bubbles and systemic financial risks.
DBS Bank said that the market expects a series of rate cuts from the Fed, but aggressive market pricing may be disappointed and ultimately trigger panic.
Economist Taimur Baig said: "An inflation rate below 3% and a policy rate above 5% are often hard to reconcile, so some monetary easing is necessary.
But the market's reflected rate cut seems excessive.
For the yield curve to reflect a rate cut of more than 200 basis points over the next 16 months, the U.S. economy must weaken significantly, and inflation must fall below 2%, which is unlikely to happen."
DBS Bank's base case is that the Fed will cut rates by 150 basis points by the end of 2025, with a 25 basis point cut this week.
"New Bond King," DoubleLine Capital CEO Jeffrey Gundlach, believes that in the current economic slowdown, the Fed needs to quickly loosen policy and will cut rates by 50 basis points this week.
Gundlach said: "From oil prices, broader prices, and upcoming layoffs, we are very likely to face a situation of deflation, which could lead to zero wage growth.
Therefore, I think the Fed is far behind the curve and should take action."
Seema Shah said that for the Fed, it ultimately comes down to deciding which risk is greater - if it cuts rates by 50 basis points, it will reignite inflationary pressures, and if it only cuts rates by 25 basis points, it may lead to a recession.
Criticized for being too slow to respond to the inflation crisis, the Fed may take a passive reaction to the risk of recession rather than a proactive attitude.
Ray Dalio, founder of Bridgewater Associates, said that the Fed must keep interest rates high enough to meet the needs of creditors, that is, they will get a real return, while not letting interest rates be too high to cause trouble for debtors.
"Whether it's a 25 basis point or a 50 basis point cut, if viewed holistically, a 25 basis point cut would be correct; if viewed from the worse, more widespread mortgage situation, then the cut could be 50 basis points."
However, Dalio said that in the long run, the decision the Fed makes this week will ultimately "have no impact."
He said that policymakers need to keep real interest rates low so that they can repay the increasing debt.