Fed to keep 50bps cut option in back pocket as economy isn't calling for rescue

Investing.com -- The Federal Reserve is likely to keep the 50 basis point rate cut option in its back pocket as the pace of the economic slowdown is screaming out for a rescue with big rate cuts, according to analysts at Capital Economics.

"[O]ur sense is that policymakers are more likely to keep the 50bp option in the back-pocket," analysts at Capital Economics said in a note ahead of the Fed's Sept. 18 meeting.

Market bets on a 50 basis point rate cut at next week's FOMC meeting have decreased slightly, but "the chances of larger cuts at subsequent meetings have increased," following signals from Fed officials. 

 "If the data suggests the need for larger cuts, then I will support that as well. I was a big advocate of front-loading rate hikes when inflation accelerated in 2022, and I will be an advocate of front-loading rate cuts if that is appropriate," Fed Governor Christopher Waller said in remarks prepared for delivery at the University of Notre Dame on Sept. 6.

The recent mixed-to-weak U.S. economic data and sharp falls in equity markets have brought the so-called "Fed put" back into focus. 

But the totality of recent economic data and the financial market backdrop makes it "hard to argue" for a rapid and forceful Fed responses seen in previous downturns.

Markets, however, are currently pricing in 125 basis points of cuts through the end of the year. 

It would take a "significant further deterioration in economic data or financial stability" to justify the pace of policy easing currently priced into money markets, the analysts added.