The Fed will cut rates on September 17th. Fed funds futures price in an 88% chance of a 25bp cut and a 12% chance of a 50bp. Fed talking heads have been touting their support for a cut, including the Chair at Jackson Hole. The market pricing reflects the judgment that the Fed, while deeply concerned about recent weak payrolls, will be restrained by worries about inflation.
The chances of zero are, well, zero, so the risks are all for 50bp. These risks of a larger cut are much greater than is priced in because there is a growing probability of a nasty adverse feedback loop between payrolls and consumer spending. The case for the Fed taking out insurance against recession is strong because both payrolls and consumer spending are below their historical stall speeds. What's the point of cutting 25bp in September and another 25bp in October when 50bp now would give a stronger signal of an intention to support jobs and confidence? If it turns out not to be needed, just skip October.
