Fed sounding board: Powell faces tough choice of 25 bps or 50 bps for first rate cut

On September 13th, Fed mouthpiece Nick Timiraos wrote in a new article that Fed Chair Powell now faces a tough decision: should the first rate cut be 25 bps or 50 bps?

This week's CPI report showed that stronger housing costs weakened the likelihood of a 50 bps rate cut next week, but another report on Thursday suggested that underlying prices in August, the Fed's favored inflation gauge, may have been much milder. Meanwhile, hiring in June and July was weaker than initially reported, while job growth improved again in August. Next week's economic forecasts are equally important: The Fed's quarterly economic projections, to be released at next week's meeting, could further complicate matters. Those forecasts will show how many rate cuts officials expect this year.

Foster, an economist who has served as a senior adviser to Powell, said the number of rate cuts in the next few months is much more important than the magnitude of the first move. The dot plot to be released next week is not the final outcome of the committee's debate, but it could be just as important to investors as the magnitude of the rate cuts, especially if officials opt for smaller cuts. As the market now expects the Fed to cut rates by more than 100 basis points this year, a smaller-than-expected rate cut could lead to a pullback in the market, which could tighten the financial environment and push up borrowing costs at a time when the Fed is cutting short-term interest rates.