Speculation on Federal Reserve Rate Cuts Amidst Strong Employment and Inflation Data

Market Speculation on Federal Reserve Rate Cuts

Just 24 hours ago, it seemed almost certain that the U.S. Federal Reserve would opt to lower its benchmark fed funds rate by 25 basis points in their upcoming meeting. However, the situation has rapidly evolved. Recent reports indicate that the employment landscape remains strong, as highlighted by the robust August jobs report released last week. Meanwhile, inflation data from this week’s Consumer Price Index (CPI) and Producer Price Index (PPI) reports revealed persistent inflationary pressures that are somewhat more stubborn than anticipated.

A report by Nick Timiraos from the Wall Street Journal—often referred to as “Nikileaks” for his insightful and reliable sources within the Fed—suggested that the decision regarding the magnitude of the rate cut is still very much under consideration.

As noted by Jon Faust, a former senior advisor to Fed Chair Jerome Powell, “I think [it] is a close call.” Additionally, Esther George, who served as president of the Kansas City Federal Reserve for over a decade until last year, commented, “You can make a very good case for 50.” She emphasized that the Fed acted swiftly to tighten policy beyond the “neutral” rate, which could imply that a similarly rapid approach to easing might be warranted.

Following the publication of Timiraos’ article, the likelihood of the Fed implementing a 50 basis point cut surged, with the CME FedWatch tool—tracking positions in short-term interest rate markets—reporting an increase to over 40% from previously lower estimates in the high teens just days prior. As of the latest updates, the probability of a 50 basis point reduction has climbed further to approximately 45%.

This news may have also contributed to a notable rebound in the U.S. stock market on Thursday afternoon, which closed with healthy gains after initially experiencing losses earlier in the day. Additionally, Bitcoin (BTC) saw an uptrend, reaching around $58,400—its highest level in over a week—before retreating slightly to $57,800.

In general, looser monetary policy is viewed as favorable for risk assets, including Bitcoin. However, given Bitcoin’s current bear market conditions, perceptions can shift quickly. Some analysts have expressed concerns that an aggressive approach to rate cuts by the Fed—if interpreted as a signal of the central bank’s anxiety over a faltering economy—might lead to further declines in prices.