Economists from Evercore ISI provided insights into the upcoming Federal Open Market Committee (FOMC) decision, indicating that a 50 basis point rate cut is likely, though not guaranteed.
They believe this move is the correct approach both for baseline economic conditions and as a risk management strategy, particularly in relation to employment.
The economists suggest that the Federal Reserve might present this rate reduction as an initial step to initiate an easing cycle aimed at ensuring a smooth economic landing.
They contrast this with a smaller, 25 basis point cut, which they argue would not be as effective, labeling a "dovish 25" as non-existent in the current economic climate.
According to Evercore ISI, market reactions favor a proactive 50 basis point cut as it would decrease risks and support cyclical assets. They caution, however, that a significant, sustained market rally is unlikely due to the uncertainties surrounding the upcoming election. Conversely, a 25 basis point cut is expected to be perceived negatively by the markets, potentially leading to a shift away from cyclical assets.
The firm's analysis points out that market pricing has been leaning towards a more aggressive rate cut at the September FOMC meeting, and the Fed has not taken steps to counter these expectations. This stance from the Fed has reinforced Evercore ISI's prediction of a larger rate cut.
Evercore ISI anticipates that the Federal Reserve will opt for a more substantial rate cut at the upcoming meeting, positioning it as a strategic move to support the labor market and manage economic risks effectively. They note that while this decision could stimulate risk-on market behavior, the broader economic and political context may limit the extent of positive market response.
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