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It might be the worst kept secret leading up to a Federal Reserve meeting. Most major Wall Street economists believe the Fed will announce a rate cut at the end of its two-day monthly meeting on Wednesday afternoon.
The Fed and Chairman Jerome Powell remain under intense pressure from President Donald Trump to cut. The question everyone is asking is, will it be a reduction of 25 basis points or 50 basis points?
Traders have priced in a 100% chance of at least a quarter-point rate cut on Wednesday, according to the CME FedWatch Tool. A quarter point would also be the first since the Federal Market Open Committee moved interest rates to zero in December 2008 during the financial crisis.
"We expect the Fed to cut rates by 25bp and guide toward additional cuts to sustain the recovery," Bank of America said.
"While the July move has been largely telegraphed, the process has been very rocky. There have been plenty of communication mishaps and confusion about the Fed's new reaction function," the bank's economists said.
All indications are that it will be a quarter-point cut but Goldman Sachs economists led by Jan Hatzius aren't ruling out a half-point cut either.
"We expect a 25bp move because virtually all of the signals from the committee point that way," they added.
"All that said, we cannot entirely rule out a 50bp move."
But according to one firm, a quarter-point cut would be the real eye-opener.
"Should the FOMC surprise relative to our expectations and deliver a 25bp rate cut, we would expect that to be paired with a more explicit easing bias, indicating that the Committee is closely monitoring downside risks to judge whether additional accommodation may be warranted," Morgan Stanley said.
"We expect the Fed to lower the federal funds rate by 50bp."
Here's what else Wall Street economists expect from the Federal Reserve meeting:
"We are in the 25bp camp for several reasons. First, several reliable media outlets have indicated this is where the Committee is leaning. Second, some Fed officials, including Eric Rosengren of the Boston Fed, remain unconvinced of the need for any easing at all; a push by the leadership for 50bp could risk fracturing the Committee. Third, in past episodes the Fed only initiated an easing with a 50bp move when there was a financial crisis or when the Fed was behind the curve and the economy was already showing signs of distress; neither of those conditions hold today. Fourth, since the last FOMC meeting the data have generally been better than expected while uncertainties have not convincingly increased."
"We expect the Fed to confirm our long-held expectation of a 25bp rate cut at the July meeting. With this easing fully priced by the market, the key question is how Chair Powell and the Committee frame the narrative for further easing through year end. The Committee should maintain an easing bias in its statement and in Powell's presser, with the onus on downside risks to definitively dissipate in order to avoid another cut in September."
"We expect the FOMC to cut the fed funds rate and the interest rate on excess reserves by 25bps, in line with consensus market expectation. We do not expect any commitment to future policy moves, but the Fed will likely reiterate their desire to 'sustain the expansion."
"We expect the Fed to lower the federal funds rate by 50bp at its July meeting, with neutral policy guidance indicating that due to increased uncertainties about the outlook, the Committee 'views that a somewhat more accommodative monetary policy is appropriate; the Committee will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion.' Should the FOMC surprise relative to our expectations and deliver a 25bp rate cut, we would expect that to be paired with a more explicit easing bias, indicating that the Committee is closely monitoring downside risks to judge whether additional accommodation may be warranted."
"If Powell puts great weight on consensus across the Committee (voters and nonvoters alike) then a 25bp could be a negotiated outcome. Those in favor of cutting would see a step in the right direction; those opposed would see it as a bid for time without having to upset comity within the FOMC. The decision would still likely face one dissent, in favor of no cut."
"A 25bp rate cut at the July meeting (in both the policy range and IOER) is likely and more than fully priced (about 30bp of cuts priced at time of writing). A 50bp cut is possible, but not probable as recently stronger activity and inflation data together with the implications of recent Fed communication all point toward a smaller, 25bp cut."
"We expect a 25bp move because virtually all of the signals from the committee point that way. The Fed leadership hasn't taken a public position but seems to support 25bp privately, based on an article in the Wall Street Journal and an unusual statement by the New York Fed indicating that a (dovish) speech by President Williams was not a signal about the upcoming meeting. Other FOMC members are mainly debating whether to cut rates at all, with little overt support for 50bp. All that said, we cannot entirely rule out a 50bp move."
"We expect the Fed to cut rates by 25bp on 31 July and guide toward additional cuts to sustain the recovery. The Fed has embraced the idea of "insurance cuts": take preventive measures and cut rates in the face of high uncertainties and a cloudy outlook. While the July move has been largely telegraphed, the process has been very rocky. There have been plenty of communication mishaps and confusion about the Fed's new reaction function...In other words, the Fed has continually pushed markets to look for more accommodation, fighting against the data. We therefore think the onus will be on Fed Chair Powell to effectively communicate the Fed's dovish forward guidance."
"The most likely outcome of the upcoming meeting in our view, and therefore our baseline call, is that the FOMC will cut rates by 25 bps. The statement will likely upgrade the recent performance of the economy to "solid," as consumer spending has picked up more convincingly and job growth has rebounded. However, the statement and Chairman Powell in his press conference are expected to emphasize the continued risks and uncertainties the global trade environment presents to the outlook."
"In prior periods of policy easing, the Fed has sometimes attempted to over-deliver versus market expectations. In the current context of an "insurance ease," however, we believe that a 25bp rate reduction is more likely than a 50bp cut all at once. This would take the federal funds target range from 2.25-2.50% to 2.00-2.25%. The outlook after July is less clear, but on balance we expect the FOMC to follow up with another 25bp rate cut at the September policy meeting."
"We expect the FOMC to cut its federal funds target rates by 25bp at next week's meeting, lowering the range to 2.00-2.25%. Consistent with Powell's comments at the June FOMC meeting, we believe the Committee will also announce an early end to balance sheet runoff, effective early August."
"We expect the Fed will cut the federal funds rate by 25bp at its July meeting that starts Tuesday and ends Wednesday, delivering on the much-discussed idea of insurance cuts to guard against the impact of trade uncertainty and slowing global growth on US activity and of persistent soft inflation on trend inflation / inflation expectations. There is little chance in our view of either a double-sized 50bp cut or no cut at all."