The Federal Reserve is truly stuck between a rock and a hard place heading into this Wednesday's pivotal rate decision. No matter which direction policymakers lean, they risk sparking serious market chaos one way or the other.
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Option 1 is sticking to a relatively hawkish 25 basis point "baby step" rate cut to stay ahead of inflation. But that meager move threatens to overtighten financial conditions against overwhelmingly dovish market expectations baked into asset prices. Such a policy misstep could detonate the hard-fought 2024 uptrend across stocks, bonds, currencies and commodities.
On the flip side, delivering a more aggressive 50 basis point "shock and awe" rate cut could catalyze a massive relief rally. But it also brings major credibility risks after the Fed projected higher terminal rates previously. A dovish downshift that big could supercharge volatility and destabilize asset prices just ahead of November's midterm elections.
The high-stakes drama plays out against a backdrop of slowing economic growth and deteriorating labor market conditions. Most Wall Street economists surveyed expect the Fed to lean hawkish with a 25 basis point cut, expecting a "soft landing" can still be achieved. However, a growing chorus of experts warn anything less than 50 basis points puts the recovery at risk.
According to Fed watchers, Chair Jerome Powell essentially has three options on the table this week:
- Stick to the 25 basis point script as academics advise to avoid fomenting excessive dovish market repricing.
- Deliver the bigger 50 basis point strike that traders envision to get ahead of deteriorating data.
- Shatter all expectations with an even more forceful 75 basis point cut to maximize the chances of sticking the elusive "soft landing."
The Fed is damned if they do, damned if they don't on Wednesday. Its decision could unleash a massive "buy the news" rally or a searing "sell the reality" retrenchment across all asset classes. Circle Sept. 20 - the aftermath is liable to dictate the market trajectory through year-end.
YOU NEED TO WATCH THIS BEFORE TOMORROW
Former hedge fund manager: "Move your money before the Fed's next meeting"
In 2022, the Federal Reserve raised interest rates and triggered a stock market event that slashed the average investor's portfolio nearly in half.
Now, according to the man whom CNBC calls 'The Prophet', the Fed could soon trigger another dramatic stock event – one investors have seen just 13 times since 1920. He warns: "This event will likely dictate the next decade of every American's financial life, and it's critical for you to take steps now to prepare."
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