It’s the question that looks likely to dominate the run-up to the Federal Reserve’s next meeting: Will it cut interest rates by a quarter-percentage point or twice that?
Fresh from their June gathering, when they indicated a potential willingness to reduce rates for the first time in a decade, some Fed officials have in recent days publicly discussed how far they may go. For now, though, investors are no wiser about just what policy makers will do when they meet again in the final days of July.
Minneapolis Fed President Neel Kashkari got things started June 21 by announcing he had argued already for a 50-basis-point move, to prevent inflation from slipping further. Expectations were bounded by his counterpart from St. Louis, James Bullard, who said June 25 that a half-point cut would be “overdone.” Those comments caught the market’s attention because he voted in June for an immediate reduction.
“The fact that Bullard, one of the leading doves who dissented in favor of a 25-basis-point cut in June, is not ready to back a 50-basis-point cut in July must cool speculation of a double-sized reduction at that meeting,” said Krishna Guha, head of central bank strategy at Evercore ISI.
At the heart of the discussion is whether officials believe the economy needs an “insurance cut” against the possibility of a slowdown, or a more aggressive move to counteract a serious deterioration that may already be underway.
Historically, policy makers have kicked off rate-cutting cycles with reductions of both sizes -- 25 basis points in 1995 and 1998 and double that in 2001, 2002 and 2007.
Trade Thaw
A June 29 meeting between President Donald Trump and his Chinese counterpart Xi Jinping at the G-20 summit in Osaka had the potential to swing the argument one way or another, but ended up being neutral, at least on a longer-term basis. The leaders declared a truce in their trade war, opening the door to renewed negotiations but leaving existing tariffs in place.
Another guidepost comes Friday, when the Labor Department releases payrolls data for June after a weak May report.
A half-point cut has several arguments in its favor.