Debate over US Federal Reserve’s Next Rate Move: Could a 50 Basis Point Cut Still Happen?

With markets largely anticipating a 25 basis point cut by the US Federal Reserve next week, there’s still a case being made for a more substantial 50 basis point move. While futures positioning is pointing to a 72-28 likelihood of a smaller cut, Evercore ISI's Krishna Guha believes that a larger reduction remains within the realm of possibility. 

Evercore’s Perspective on a 50 Basis Point Cut 

Krishna Guha, a leading voice from Evercore ISI, has consistently advocated for a 50 basis point rate cut, arguing that it would reduce risks to both economic stability and market performance. Guha’s position has found some backing from recent reports in both the Wall Street Journal and the Financial Times, suggesting that the Federal Reserve policymakers might still be open to the idea of a larger cut. 

Guha points out that while futures markets are largely expecting a 25 basis point cut, reports from reputable financial journalists like Nick Timiraos of the Wall Street Journal and Colby Smith from the Financial Times indicate that a 50 basis point reduction hasn’t been entirely ruled out. He warns of the dangers of relying too heavily on confirmation bias but also notes that these reports suggest the decision for a smaller cut isn't set in stone. 

The Rationale Behind a Larger Cut 

Evercore’s argument in favor of a 50 basis point cut centers around concerns that a smaller, 25 basis point move could leave the US economy and financial markets vulnerable. According to Guha, a "dovish 25" may not exist in reality—meaning that even if the Federal Reserve tries to soften the impact of a smaller rate cut with accommodative language, it may not prevent negative market reactions. This is particularly concerning because the time between the next meeting and the November gathering leaves a long window for potential market turmoil. 

Guha believes that a 50 basis point cut would provide a more robust cushion, reducing risks to the much-discussed "soft landing" for the US economy, a scenario where inflation is tamed without triggering a recession. He contends that a larger cut would help stabilize market sentiment, which has been volatile in the lead-up to the Federal Reserve's decision. 

Market Pricing and the Fed’s Potential Surprise 

The market is predominantly pricing in a 25 basis point cut, but Guha suggests that if sentiment shifts closer to a 50-50 split in expectations by the weekend before the meeting, the Federal Reserve might deliver a 50 basis point cut. He notes that while the Fed can afford to surprise markets with a dovish move—such as a larger-than-expected cut—it cannot afford to surprise hawkishly by holding back on rate reductions or going with a smaller cut if expectations are evenly split. 

Guha’s comments indicate that the Federal Reserve’s decision-making process remains fluid. He suggests that key financial reporters could play a significant role in shaping market expectations ahead of the meeting. If the Wall Street Journal or Financial Times were to publish reports leaning more heavily toward a 50 basis point cut in the days leading up to the decision, it could signal that policymakers are seriously considering the larger move. 

The Broader Economic Context 

This debate over the size of the next rate cut comes amid a complex economic backdrop. Inflation has shown signs of easing, but growth remains fragile. US labor market data has been mixed, with some indicators pointing to cooling job creation. In such an environment, the Federal Reserve is walking a tightrope, trying to balance the need to support economic growth while also ensuring inflation remains under control. 

At the same time, global economic conditions add another layer of complexity. Central banks around the world are grappling with similar challenges, and the Federal Reserve's decisions have significant ripple effects in international markets. A 50 basis point cut would send a strong signal to global markets that the US central bank is taking proactive steps to ensure economic stability. 

Bottomline 

While the consensus view in financial markets is leaning toward a 25 basis point cut from the Federal Reserve next week, Evercore’s Krishna Guha believes that a 50 basis point reduction is still a possibility. Guha argues that a larger cut would better insulate the US economy and financial markets from risks in the months ahead, reducing the chances of a sharp sell-off. As the meeting approaches, all eyes will be on key reports and market positioning to see whether expectations begin to tilt toward a more aggressive rate cut.