Fed expected to guide for “larger sized” future interest rate cuts – Citi

Investing.com — The Federal Reserve will likely indicate on Wednesday that it plans to roll out “larger sized” interest rate reductions in the future, according to analysts at Citi.

The Fed is widely anticipated to slash rates for the first time since March 2020 following the conclusion of its latest two-day gathering, bringing borrowing costs down from a two-decade high range of 5.25% to 5.5%.

Uncertainty surrounds the size of the potential cut, however. According to CME Group’s (NASDAQ:CME) closely-monitored FedWatch Tool, the chances of an aggressive 50-basis point cut — rather than a more traditional 25-basis point drawdown — stand at 65%.

Bets that the Fed will roll out a jumbo drawdown have increased in recent days, fueled by reports in the Financial Times and Wall Street Journal that the move is still a possibility. Meanwhile, former New York Fed President Bill Dudley has said there is a “strong case” for a deeper cut, arguing that borrowing costs are currently well above the so-called neutral rate which neither restricts nor accommodates economic activity.

In the final data point before the announcement, US retail sales unexpectedly rose in August, pointing to consumer resilience. Such trends, along with mixed recent inflation figures and loosening labor demand, could further complicate matters for Fed officials.

Along with the projected cut, the Fed’s announcement will also include a fresh look at policymakers’ rate projections, an update to its official statement, and a press conference with Chair Jerome Powell.

Traders will likely be hunting for any insight into how the Fed plans to approach a possible easing cycle, with markets currently expecting at least 100-basis points in cuts by the end of 2024.

“No matter the cut size, we expect a dovish meeting with Powell guiding toward — and markets pricing — larger sized cuts at future meetings,” the Citi analysts said in a note to clients.

They added that although the retail sales figures were stronger than economists’ estimates, details in the report — including a decline in restaurant spending — raise concerns around a “developing economic slowdown.”