The Fed will meet next week, and the bet on "50 basis points" persists even after the weak non-farm payroll data.

Although most Wall Street views believe that the threshold for a significant rate cut by the Federal Reserve is high, traders have not ruled out the possibility of the Fed cutting rates by 50 basis points at the upcoming meeting. Based on the most likely scenario reflected in the current market pricing, the Fed may lower the federal funds rate (overnight lending rate) by 25 basis points on September 17. According to the "FedWatch tool" by CME Group (calculating the probability of Fed policy actions through 30-day federal funds futures contracts), the market on Monday afternoon expected a probability of around 88% for a "25 basis point rate cut". However, this also means that there is still a slight probability that the FOMC may continue the practice from the September 2024 meeting and choose to cut rates by 50 basis points, with the current probability being 12%, and traders have largely ruled out the possibility of the committee "keeping rates unchanged". The non-farm payrolls data released last Friday became a key driver for the market sentiment to shift towards "betting on Fed easing": the US non-farm payrolls added only 22,000 jobs in August, the unemployment rate rose to 4.3%, reaching a nearly four-year high. Citigroup economist Andrew Hollenhorst stated in a report released after the employment data was published, "The weak August employment report will drive consensus within the FOMC - not only should a rate cut be restarted this month, further rate cuts in the coming months may also be an appropriate choice." Although Hollenhorst believes that some members within the FOMC may support a "larger rate cut", "we believe that the majority of the committee members will not support a 50 basis point rate cut". Members who may lean towards a significant rate cut include Fed board members Michelle Bowman, Christopher Waller, and Stephen Miran if his appointment is approved by the Senate before the Fed meeting. Citigroup's view slightly deviates from market consensus: they predict that the FOMC will implement rate cuts in the next five meetings, as Fed officials will "penetrate current inflation trends" and focus more on signals of weakness in the labor market. The core logic of this judgment is that while Fed officials still have concerns about inflation, they will shift policy focus more towards employment targets. Nomura Securities economist David Seif stated, "The August employment report lays the foundation for the Fed to introduce a series of 'precautionary rate cuts' at future meetings. However, given that inflation risks are still high, we expect officials to not take more aggressive easing measures unless there is clear evidence of increasing pressure in the labor market or significant tightening in the financial market environment." The mainstream expectation in the current market is: the Fed will cut rates once next week, take no action in the October meeting, and then initiate another rate cut in December. Rare cases of skipping meetings without taking action during a "rate adjustment cycle" have been noted since Federal Reserve Chairman Jerome Powell started holding press conferences after FOMC meetings. However, Torsten Slok, an economist at Apollo Global Management, pointed out that policymakers are currently in a "dilemma": inflation remains above target levels, while employment data appears weak, making it difficult for the Fed to fulfill its dual mandate of "stable prices" and "full employment". Upcoming CPI data will be crucial Later this week, Fed officials will receive two critical sets of inflation data - Producer Price Index (PPI) and Consumer Price Index (CPI) - these are the last important economic data before the meeting. According to economists surveyed by Dow Jones, the overall CPI year-over-year increase in August may rise to 2.9%, while the core CPI (excluding food and energy) year-over-year increase is expected to remain at 3.1%. If the CPI data exceeds expectations, it is highly likely to solidify the policy path of a "25 basis point rate cut". Slok said in an interview on Monday, "The worst-case scenario is that if inflation unexpectedly rises, it will make policy decisions extremely difficult. Next week we may start discussing a core question: how should the Fed formulate policy when one side of the dual mandate requires rate cuts and the other side requires rate hikes?" However, Slok still predicts that even if inflation remains stubborn, the Fed's policy bias will continue to be accommodative. He explained, "I believe that officials will start discussing inflation expectations more, while reducing the weight of current inflation data and focusing more on future inflation trends."