Since Friday, the market's expectation of a 50 basis point rate cut by the Federal Reserve has surged. It is worth noting that this change in market sentiment is not due to new economic data or a shift in Fed policy, but rather from two suspected media reports of the Fed 'leaking' information.
Currently, the Federal Reserve is in a 'quiet period' before the policy announcement, during which officials will not speak publicly. Therefore, 'whispering' to the 'media mouthpiece' has become an effective tool for shaping expectations. Mohamed El-Erian, Chief Economic Advisor of Allianz Group, stated:
"The market's expectation of a 50-basis-point rate cut by the Federal Reserve this week has heated up and has become the most likely result in the eyes of traders, surpassing the expectation of a 25-basis-point cut..."
Market sentiment was mainly influenced by the reports from 'informed sources' in The Wall Street Journal and the Financial Times last Friday, and Fed officials did not explicitly refute this in the subsequent market turmoil.
On Sunday the 15th, a senior central bank reporter once again 'cheered' for a 50-basis-point cut - Greg Ip, a senior central bank reporter for The Wall Street Journal, based on the current economic situation, believes that the need for further Fed rate cuts is increasingly apparent, and called for a 50-basis-point cut. CNBC reporter Carl Quintanilla commented, 'The opinion leaders have spoken!'
Against this backdrop, Jim Reid, Director of Global Economics and Thematic Research at Deutsche Bank, analyzed in a report on the 16th that if the Fed is not satisfied with the current 50-basis-point expectation, they will clarify by initially hinting at a 25-basis-point cut through the media on Monday and Tuesday. If there is no media report hinting at an increase of 25 basis points before Wednesday, market expectations for a 50-basis-point cut will further rise:
"The media trends in the next 12 hours are crucial and may ultimately determine market pricing."
"Forward guidance"?
Last week, Nick Timiraos of 'New American Federation News Agency' published an article, believing that a rate cut of 25 basis points or 50 basis points is a 'close decision.' Matt Luzzetti of Deutsche Bank believes that the article tends to support a more significant rate cut.
The Financial Times' Colby Smith also published a similar article, with Matt Luzzetti's interpretation being that the article tends to oppose a larger interest rate cut.
After the release of the August CPI data in the USA, the market generally expects a higher likelihood of a 25 basis points rate cut. However, articles from The Wall Street Journal and Financial Times have led to a reassessment of the rate cut magnitude, with an increase in the probability of a 50 basis points rate cut.
On Sunday the 15th, senior central bank journalist Greg Ip of The Wall Street Journal published an article supporting a 50 basis points rate cut. Ip, based on the current economic situation, believes that the need for further rate cuts by the Federal Reserve is becoming more apparent, calling for a 50 basis points rate cut. CNBC journalist Carl Quintanilla commented: 'The opinion leaders have spoken!'
According to the analysis of President James Bianco of the research institution Bianco, due to the more ambiguous guidance from the Federal Reserve, the market will factor in greater risk premiums and higher volatility:
On Friday, the closing prices of Federal Funds Rate Futures showed probabilities of 49% for a 50 basis points rate cut and 51% for a 25 basis points rate cut (see chart). From the Federal Reserve's perspective, this is almost equivalent to maximum uncertainty (50/50), the worst-case scenario.
If this situation continues until Wednesday, nearly half of Wall Street professionals will be greatly surprised. The Federal Reserve has designed forward guidance precisely to avoid this situation, by informing the market of its intentions before taking action.
Therefore, the following two scenarios are expected to occur:
An article clarifying the report on how much the Fed will cut interest rates on the 18th. It may come out on Monday morning.
If there is no clarification, the discussion about the failure of forward guidance will become very intense. The market will have to adapt to a world where the Fed releases more ambiguous information, which means that when predicting the Fed's intentions, the market will factor in a greater risk premium and higher volatility, especially in the financing market.
I expect the first scenario to occur. But if the second scenario occurs, I hope Powell can explain it at Wednesday's press conference.
On Friday, the closing prices of federal funds rate futures indicated a 49% chance of a 50 basis point cut and a 51% chance of a 25 basis point cut.
This has also sparked thoughts from Mohamed El-Erian, Chief Economic Advisor at Allianz Group:
During the 'silent period', how will the Fed respond to media reports?
Given the market's widespread expectation of a 50 basis point cut, will the Fed's senior officials ultimately be pressured to choose a 50 basis point cut?
Deutsche Bank: 50BP? The next 12 hours will tell!
So, will the Federal Reserve cut interest rates by 25 or 50 basis points on Wednesday?
Deutsche Bank analyst Matt Raskin believes there are two possibilities in the future: either the media will guide the market's expectations back to a 25-basis-point rate hike, or the Federal Reserve will ultimately announce a 50-basis-point rate hike on Wednesday.
Jim Reid, Global Head of Economic and Special Topic Research at Deutsche Bank, believes that if the Federal Reserve is not satisfied with the current 50-basis-point expectations, it will clarify by leaking a 25-basis-point rate cut through the media on Monday and Tuesday. If there is no media report hinting at a 25-basis-point rate hike before Wednesday, the market's expectations for a 50-basis-point rate cut will further rise:
"The media trends in the next 12 hours are crucial and may ultimately determine market pricing."
Editor/Somer
