The Federal Reserve is set to cut the federal funds rate for the first time in over four years at the upcoming Federal Open Market Committee meeting on Wednesday. The size of the cut is a subject of debate as the meeting approaches.

The key options on the table are either a 25-basis-point cut or a more aggressive 50-basis-point cut. As of Monday morning, investors and speculators slightly lean toward the larger 50-basis-point cut.

Recent Media Articles Push Market Expectations Toward 0.5% Cut

Currently, market participants are leaning slightly toward the latter. According to CME Group’s FedWatch tool, Fed futures are pricing in a 65% probability of a 50-basis-point cut as of 8:00 a.m. Monday, up significantly from just 30% a week ago.

Similarly, betting markets tracked by Polymarket are now assigning a 58% chance of a half-point cut, up from a mere 9% last Thursday.

Communication from Federal Reserve officials prior to the pre-FOMC blackout period, initially suggested a 25 basis point cut to 5.00-5.25%.

Yet, recent media reports indicating it’s a close call have since shifted market expectations toward the possibility of a larger 50 basis point cut.

Notably, Wall Street Journal reporter Nick Timiraos and Bloomberg Opinion columnist Bill Dudley have published articles driving market sentiment towards the half-a-percentage-point option.

The WSJ article stated that the FOMC “are confronting questions over whether to cut by a traditional 0.25 percentage point or by a larger 0.5 point.”

Dudley, a former president of the Federal Reserve Bank of New York, argued the logic for a 50-basis-point cut is “compelling.”

He stressed that the Fed’s dual mandate—price stability and maximum sustainable employment—has come into closer balance. This suggests that monetary policy should be neutral. Yet, current short-term interest rates remain significantly above neutral. That’s a disparity Dudley believes should be corrected quickly with an outsized cut.

Wall Street Analysts Predict a 25-Basis-Point Cut

Analysts at Bank of America and Goldman Sachs are forecasting a more modest 25 basis point cut.

Bank of America rates strategist Mark Cabana, CFA expects a 25-basis-point reduction at the September FOMC meeting, noting that Fed officials did not signal a larger cut before the blackout period. Additionally, recent U.S. inflation data has been slightly firm.

“This is a low-conviction Fed, and the policy path will hinge on the data rather than forward guidance. On balance, we expect the market to interpret the September FOMC as delivering a neutral to dovish cut,” Cabana stated.

He also anticipates 75 basis points of cuts in 2024, suggesting two additional 25-basis-point reductions in November and December.

Similarly, Goldman Sachs economist David Mericle expects a 25-basis-point cut.

A larger cut would be “somewhat out of keeping with usual Fed practice,” Mericle says. They are typically delivered during an obvious crisis or a significant spike in unemployment.

Assuming the FOMC delivers the 25-basis-point cut on Wednesday, Mericle expects the median dot plot to indicate three additional 25-basis-point cuts in 2024. He expects quarterly cuts thereafter.

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