How Much Will the Fed Cut Interest Rates?

Treasury Yield and Federal-Funds Rate

Bearish Jobs Reports Sow Fear of Economic Slowdown

With inflationary pressures finally easing after two years, central bankers have been preparing for months to loosen policy for the first time since the onset of the pandemic. The conversation took on a new urgency in July and August, when data showing that the US economy created fewer jobs than expected sparked fears among some investors that overly tight monetary policy had damaged the labor market.

Monthly Payroll Change

For investors, there's a big difference between the Fed steering the economy toward a comfortable soft landing and reacting to the threat of a recession. If officials are concerned the economy could see a downturn, they're more likely to slash rates quicker and deeper.

Why Would the Fed Cut Rates by 50 Basis Points?

Risks of a 50-Basis-Point Cut

Investors Lean Toward a 25-Basis-Point Cut

Expectations for the scope of the first cut have been inconsistent as traders struggle to digest mixed economic data. A month ago, bond traders saw a 53% chance that the Fed would reduce rates by 50 basis points, according to the CME FedWatch Tool. A week ago, that probability fell to 30%, and then even lower after a mostly positive August inflation report.As of midday Friday, bond market futures were pricing in a 45% chance of a larger cut and a 55% chance of a smaller cut.

Federal-Funds Rate Target Expectations for Sept. 18, 2024 Meeting

Larger Cuts Could Come Later

Investors Should Keep the Long Term in Mind but Prepare for Opportunities

Amid all this uncertainty, Scott Wren, senior global equity strategist for the Wells Fargo Investment Institute, says long-term investors shouldn't get too hung up on the details. "For retail investors who are trying to build wealth over time, the important thing is that the Fed's going to start a series of cuts," he says. "A quarter-point here or there is like splitting hairs. The important thing is that rates are coming down."Wren expects the Fed's easier policy to boost economic growth but cautions that markets could be choppy in the shorter term as investors adjust to a new cycle. That could present a near-term opportunity for investors with cash on the sidelines. "As hard as it is for retail investors, they should welcome these pullbacks if their timeframe is three-plus, five-plus years, because then they can buy stocks when they're when they're down," he says.