First Rate Cut Expected Today: Here’s Your Trading Guide

The Federal Reserve is set to announce its first rate cut in over four years on Wednesday, signaling a major pivot from its previous emphasis on inflation control.

Markets remain split on the scale of the cut. Futures markets indicate a 63% chance of a 50-basis-point reduction as of Wednesday morning, up from 14% a week ago. The odds of a 25-basis-point cut stand at 37%.

Wall Street and the futures market show divergence as most institutions forecast a 25 basis point rate cut.

Morgan Stanley’s Global Investment Committee believes the Fed can achieve a much-anticipated soft landing. "This scenario likely calls for slow and shallow rate reductions, in quarter-point increments toward 3.5% by the end of 2025," the committee said.

However, some argue for a 50 basis-point cut instead. Bloomberg Chief US Economist Anna Wong said, “In our view, forecast coherence and risk management point to 50 basis points as the right choice. The absence of a clear steer — so far — on the possibility of a jumbo move points toward the 25-basis-point option.”

JPMorgan Chief Economist Michael Feroli told CNBC last Thursday that the Fed should lower rates by half a percentage point this month to quickly reach the central bank’s neutral rate of around 4%. “We think there’s a good case that they should get back to neutral as soon as possible,” he said.

The Fed’s decision on the extent of rate cuts hinges on balancing the trade-offs between combating inflation and bolstering the labor market. “For the Fed, it comes down to deciding which is a more significant risk — reigniting inflation pressures if they cut by 50 bps, or threatening recession if they cut by just 25 bps,” said Seema Shah, Chief Global Strategist at Principal Asset Management.

Analysts are divided on whether the latest rate cut will trigger a new bull market. JPMorgan strategist Mislav Matejka believes "the Fed will start easing, but more in a reactive way and as a response to weakening growth — this might not be enough to drive the next leg higher." Veteran strategist Jim Paulson, however, contends that the Fed's rate cuts could herald a "brand new bull market."

Consumer staples, healthcare, and utilities have historically performed best in such periods, while cyclical sectors like consumer discretionary, energy, and materials have generally lagged. Notably, this trend has held steady regardless of whether the economy enters a recession.

We've conducted an in-depth analysis of the sectors that perform best during rate cuts. For more details, please read the following article:

Goldman Sachs reiterated its bullish stance on gold this week, maintaining a price target of $2,700 per ounce by early 2025. The bank cited the close relationship between Federal Reserve policies and gold prices, alongside rising central bank demand. Goldman noted that increasing holdings in physically-backed gold ETFs suggest the precious metal will continue to benefit from the Fed's easing cycle.

UBS also supports gold. "With upcoming Fed cuts reducing the opportunity cost of holding the non-interest-bearing asset, we expect gold prices to hit $2,700/oz by June next year," UBS Wealth Management wrote in a client note on Sept. 16. "Gold’s hedging properties make it an attractive proposition from a portfolio perspective amid macro and geopolitical uncertainties."

Mooers~ Will the Fed lower rates by 25 or 50 basis points this time? What trading opportunities might emerge following the rate cut? Let's discuss.