Huge Fed Rate Cut Decision Looms This Week

It's still a toss-up whether the Fed will cut by 25 basis points or 50 basis points.

It’s Fed week! This Wednesday, the Federal Reserve will almost surely cut interest rates for the first time in four-and-a-half years—but by how much is still an open question.

Last week’s higher-than-expected Consumer Price Index report was supposed to be the final data point that swayed the U.S. central bank one way or the other.

A 25-basis point cut was the expectation with inflation running slightly hotter than hoped in August. But a Wall Street Journal article published late last week suggested that a 50-basis point cut was still a possibility, causing traders to raise the odds of a bigger reduction.

Fed Rate Cut: 25 or 50 Basis Points?

Currently, there is a 53% chance of a 25-basis point cut and a 47% chance of a 50-basis point cut, according to the pricing of fed funds futures. 

The current rate is 525-550 basis points, although the Fed has not raised the interest rate since last July as inflation inched down, albeit more stubbornly than central bankers had hoped. A hot jobs market has also bedeviled the Fed, which has vowed repeatedly in recent months to make their decision data dependent. 

Will Retail Sales Be a Factor?

Tuesday’s retail sales data is the last significant piece of economic data to come out before the Fed makes its decision. 

A month-over-month decline of 0.2% is anticipated for August retail sales, while a month-over-month increase of 0.2% is expected for retail sales ex autos. 

Retails sales are usually not a decisive factor when it comes to rate decisions, but the latest figures could have an outsized impact given the timing of their release and the razor thin margin between the two rate cut options. 

But regardless of what the Fed ultimately decides to do, for investors, it might not matter much. What’s more important is the trajectory of interest rates beyond where they stand this Wednesday. 

Six months from now, will rates be 100 basis points lower or 200 basis points? And what will economic growth look like?

The answers to those questions will matter more for stock and bond ETFs than what happens this week.