Do We REALLY Want 50bps Though?

The market’s betting big on a rate cut, but could a bold move from Jay Powell send us straight into chaos?

As we stare down the barrel of an almost comically important Federal Reserve decision, the market is revved up like a litter of kittens snorting Adderall, convinced that a 50 basis point (bps) cut is not only happening but economically necessary to curb their cheap money cravings that have gone ignored for four years now. 

But let’s pause for a second. Do we really want that 50bps? Sure, it’s tempting. It sounds bold, and decisive, like the Fed is cutting through all the noise and saying, “Here’s some juice to keep that engine humming.” But what if it’s more like ripping the brakes out of a speeding car while it’s heading downhill?

WHAT HAPPENED

In the lead-up to the next FOMC meeting, market chatter has reached fever pitch, and everyone’s favorite rumor mill, the financial media, has all but guaranteed that we’re in for a 50bps cut. The Wall Street Journal, Financial Times, and a few other credible whispers have dropped hints that at least some Fed members are toying with the idea of slashing rates by 50bps. That’s got the markets betting heavily on a juicier rate cut, with many traders going long on risk assets like they’re playing baccarat with a Bond villain.

Naturally, risk assets have rallied hard in anticipation. We’re talking US long-end bonds, gold, and even the yen making this look like a classic “we’re about to enter an easing cycle” vibe. Meanwhile, equities are hovering near all-time highs, and financial conditions are looking so easy during this FOMC blackout period that the market looks like it’s shrugging and asking, "Why not 50 tho?"

WHY IT MATTERS

Sure, cutting by 50bps might sound like the Fed is throwing a dramatic Hail Mary to rescue the economy from a slowdown. But is the economy really that desperate? Most of the recent data doesn’t scream “emergency.” Inflation is still edging down, but it’s not exactly plummeting. The unemployment rate is a bit of a mixed bag. Yes, it’s up slightly, but we’re not in recession territory… yet. Meanwhile, consumer spending, while sluggish, hasn’t fallen off a cliff.

So, why the push for 50? Some argue the Fed can’t afford to disappoint the market. Sure, a 25bps cut might feel like getting socks for Christmas when you asked for a PlayStation 5, but would that really send markets spiraling? The problem with starting big (like say 50bps) is that it sets a precedent. Like the cheap money addict we all know it is, once you hit the market with a 50bps cut, it’ll expect the same every time things get a little wobbly.

Let’s also not forget that a 50bps cut without the proper follow-through could backfire spectacularly. If the Fed signals a slower easing pace after the big cut, financial conditions could tighten right back up, taking risk assets like oil and inflation-sensitive sectors along for the ride. In short, giving the market what it wants now could create more volatility later. There’s no methadone for cheap money dependency.

And let’s not forget our thorny geopolitical reality. With tensions flaring in the Middle East (“assassination via exploding pagers” is a thing now), the Russia-Ukraine situation, and ongoing trade friction with China, the global economic landscape is anything but stable. A 50bps cut could be perceived as a panic move in the face of external risks, which could drive more flight to safety, which would also tighten financial conditions right when the Fed is trying to loosen them. Oil, which is already volatile thanks to supply uncertainties, could swing even more wildly, and currencies like the yen might see further appreciation. That’s not exactly the “orderly adjustment” Jay Powelll has openly fetishized for years now.

Lastly, let’s talk politics (don’t roll your eyes). This Fed decision lands squarely in the middle of the pre-election cycle, and the optics of a 50bps cut could be easily politicized. A big rate cut might be interpreted as an attempt to juice the markets ahead of the election, giving the Harris-Walz ticket more to crow about and the Trump-Vance ticket more ammo to argue about a rigged election. And as much as the Fed likes to tout its independence, perception is a funny thing… especially in an epically nasty election year.

WHAT’S NEXT

So, what happens if we go ahead with 50bps? In the short term, markets will probably go a little nuts. We could see risk assets rally for another week or two, with gold, US bonds, and the yen performing well. But after that? Don’t be surprised if things get a little messy. The market will already start to question the Fed’s next move. Will they slow down after this or keep slashing? Mixed signals to cheap money addicts could lead to a (you guessed it!) tightening of financial conditions. Plus, if economic data doesn’t back up the aggressive easing, it could spark a wave of profit-taking and repositioning in risk assets.

And let’s not forget: If geopolitics heat up (say, another oil shock from the Middle East, or Iran deciding to go to war directly, or a sharp escalation in the Russia-Ukraine conflict) this rate cut might not be enough to cushion the blow. A 50bps cut might look good on paper today, but it could leave the Fed without enough ammo if the global situation deteriorates.

On the flip side, a more measured 25bps cut, paired with strong forward guidance for potential future cuts, might be the safer play. It would keep the market calm without blowing the lid off expectations, giving the Fed room to adjust as more data rolls in. After all, do we really want to go all in on 50bps only to find out that the economy wasn’t in freefall after all? Maybe the right move is to save some of that firepower for later.