Experts warn that big moves would be a mistake

The big debate on Wall Street — a Fed rate cut — is back in the spotlight.

This time, it’s not whether Jerome Powell’s central bank will act at its September meeting, but rather the size of the cut: 25 basis points or 50.

The case for a 50-basis-point cut has grown stronger in recent weeks as a weakening jobs market has prompted calls for more aggressive Fed action to avoid further economic damage.

Yet despite the doom and gloom scenarios, strategists and economists told me this week that a 50 basis point cut would send the wrong message to the market — one that signals the central bank is too late to act .

“A cut of 50 basis points would smack of panic and it’s almost like we’re totally behind the curve at this point,” warned Jennifer Lee, senior economist at BMO Capital Markets.

She added, “We’re holding back… But the fact that the U.S. economy has held up this long speaks to everyone’s resilience.”

Lee points to upwardly revised second-quarter GDP, resilient consumer spending and the lack of mass layoffs among factors supporting his call for a more measured approach, adding that a soft landing is “on the cards.”

A bigger discount could also raise alarm bells for investors. Eric Wallerstein of Yardeni Research told me that a jumbo cut could cause volatility and signal that the economy is “heading in the wrong direction.”

“For everybody calling for a 50 basis point cut, I think they should really reconsider the amount of volatility that would cause in the short-term funding markets,” Wallerstein said.

The veteran pair’s ratings are in line with Goldman Sachs chief economist Jan Hatzius, who told Yahoo Finance executive editor Brian Sozzi this week that he expects a series of cuts of 25 basis points (though not completely ruled out a further 50 basis point discount). week).

With less than a week to go before the Fed’s decision, traders are pricing rates near par for a 25-to-50-basis-point discount. As of Friday, the probability of a 50-basis-point cut has risen to 49%, up from 30% a week ago.

At the heart of the interest rate cut debate is the risk of a recession, a concern that has plagued Wall Street for years.

Longtime market strategist Jim Paulsen told me in Opening Bid (video above; listen here) that continued fear of a recession is not necessarily a reflection of deteriorating economic footprints. Rather, it is attributable to several factors: the shock of the pandemic, the polarizing political environment, and the breakdown of recession forecasting tools.

“Every recession tool we’ve ever used to predict recessions has blown up or simply stopped working,” Paulsen warned. “We are at a loss as to how to assess recession risk.”

The story continues

The inverted yield curve, slowing money supply growth rates and the Conference Board’s Leading Economic Index (LEI) all signaled a recession, leaving Wall Street worried.

While the Federal Reserve’s rate cut decision on Wednesday is unlikely to resolve the ongoing recession debate on Wall Street, it should provide some near-term clarity for investors.

If market pundits are right, the size of the rate cut could signal whether the economy is at greater risk of weakening, which could roil financial markets and sway recession calls firmly in one direction.

Shut up.

Sean Smith is an anchor at Yahoo Finance. Follow Smith on Twitter @SeanaNSmith. Advice on deals, mergers, activist situations or anything else? Email [email protected].

Three times a week, Yahoo Finance Executive Editor Brian Sozzi insightful field conversations and chats with the biggest names in business and markets Opening offer. You can find more episodes on our website video hub or follow you your favorite streaming service.

In the Opening Bid episode below, former Trump Federal Reserve nominee Judy Shelton shares her outlook for the economy.

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