The Federal Reserve is facing a big decision on how much to cut interest rates. The debate centers on whether they will cut rates by 25 or 50 basis points, which are small changes in interest rates. Recently, many experts believe the Fed may go for the larger cut of 50 basis points.
Some economists worry that if the Fed chooses the bigger cut, it could cause panic in the financial markets. Gregory Daco, the chief economist at EY, explained that if the Fed doesn’t cut rates by as much as expected, it could lead to higher interest rates. This, in turn, could hurt consumer spending and the overall economy.
David Kostin, the chief U.S. equity strategist at Goldman Sachs, shared a similar view. He said that the future of the stock market depends on whether the Fed can keep the economy growing while avoiding a recession. Kostin’s team predicts the S&P 500 could reach 6,000 in the next year, but that depends on the Fed’s actions.
Many experts agree that the Fed is unlikely to surprise the markets. Matthew Luzzetti, a chief economist at Deutsche Bank, said the Fed typically avoids making unexpected moves that might cause panic.
As of Monday, the markets were expecting a 61% chance that the Fed will cut rates by 50 basis points. With those odds, a 50 basis point cut wouldn’t shock anyone. In fact, some believe that a smaller cut of 25 basis points could have the opposite effect and tighten financial conditions, raising interest rates.
Neil Dutta, head of economics at Renaissance Macro, said that with the current risks to the economy, the Fed should avoid making moves that would make things harder for businesses and workers. For now, most experts believe the Fed will aim to keep financial conditions stable and support economic growth.
