The probability of a 50 basis point rate cut has risen to 50%

Former New York Fed President Dudley said there is "sufficient reason" to cut interest rates by 50 basis points next week, and with the recent endorsement from well-known financial journalists such as "Fed Communications Agency" Nick Timiraos, the market's bet on a rate cut by the Fed next week has risen to a "fifty-fifty" chance.

The latest data from Fedwatch shows that the probability of traders in the swap market expecting the Fed to choose a significant rate cut this month rose to 50% this morning, up from 15% on Thursday.

Strong Market Reaction

Previously, the expectation of a rate cut on Friday had already risen significantly, and this positive news led to a strong rally in the US stock market, driving the S&P 500 and Nasdaq Composite to their largest weekly gains so far this year, rising by 4% and 6% respectively. The Nasdaq index had just experienced a sharp decline the previous week.

Mark Dowding, Chief Investment Officer at RBC BlueBay Asset Management, also stated that with the rate cut of 50 basis points almost fully priced in on Thursday, it is now "very likely".

Currently, the market still expects a 50% chance of a 25 basis point rate cut, but this market expectation has significantly decreased compared to Thursday's expectation.

Former New York Fed President Bill Dudley said on Friday that he believes there is "sufficient reason" to cut interest rates by 50 basis points next week, emphasizing the restrictive impact of the current 5.25%-5.5% interest rate on economic growth, the highest level in 23 years.

Historically, the Fed has typically adjusted rates by 25 basis points, but if officials believe there is a risk of the economy slowing too quickly, a 50 basis point rate cut may be taken as a precautionary measure.

Tim Duy, Chief US Economist at SGH Macro Advisors, said:

"The path the Fed is least likely to regret is to cut rates by 50 basis points first. This is the only logical policy choice."

Gabriele Foà, Fund Manager at Algebris Investments, also stated that the Fed is "better off...cutting rates early" rather than risking "lagging behind the curve" in an economic downturn. Meanwhile, former New York Fed President William Dudley and economists such as Michael Feroli from JP Morgan have also suggested that the Fed should further cut rates to avoid falling behind the curve:

"We believe it is clear what the Fed should do next week: cut the policy rate by 50 basis points to adapt to the evolving risk balance."

Uncertainty Remains

However, some analysts still remain cautious. Goldman Sachs believes that although the expectation of a 50 basis point rate cut is increasing, there is still a high probability that the Federal Reserve will cut rates by 25 basis points next week.

Wednesday's Federal Reserve meeting is the last meeting before the November presidential election, with officials attempting to guide the U.S. towards a "soft landing," suppressing inflation without causing a recession.

It is worth noting that gold prices hit a historical high this week, while the 10-year U.S. Treasury yield touched a 15-month low, both of which can be seen as signals of economic deterioration. Some Federal Reserve officials have also expressed concerns, stating that if a 50 basis point rate cut is implemented initially, it could easily cause market panic and hinder the Fed's management of market expectations and inflation control.

Furthermore, the latest data shows that the overall inflation rate in the U.S. has dropped to 2.5%, close to the Fed's 2% target, but the core inflation rate has risen by 0.3% month-on-month due to factors such as pressure from the housing market. Wylie Tollette, Chief Investment Officer at Franklin Templeton Investment Solutions, commented:

If inflation rates in the housing and related sectors continue to rise, a 50 basis point rate cut may accelerate or amplify this trend. I expect a rate cut of 25 basis points.

Salman Ahmed, Global Head of Macro at Fidelity International, believes that there is still a lot of uncertainty surrounding the rate cut, "It's a cat and mouse game... We have already started the rate cut cycle, but there are still many unknowns."