As of today, investors forecast a 79% probability of a 25 basis points cut and a 21% likelihood of a larger 50 basis points cut according to CME Fedwatch Tool. Several economic data releases have shown a weakening of the US economy, but there’s still no apparent sign of a recession. While the US economic growth slowed to 2.1% in the second quarter compared to 3.1% in the first quarter, consumer spending remained strong, showing that Americans are not yet concerned about the impact of trade tariffs and slowing global economic growth. However, businesses have been curtailing their investments and if this becomes a trend, consumer confidence will eventually decline, leading to less spending in the future.
Overall, it doesn’t seem like there’s an urgency for a 50-basis point rate cut at this stage. It may even send the wrong signal if the Federal Reserve cuts rates aggressively. A large rate cut may indicate the Fed knows something others don’t, which will likely have negative consequences on asset prices and the US Dollar. Our base case scenario is to see a 25-basis point rate cut on Wednesday with further easing if economic data deteriorates further.
