In an unusual situation, the bond market is going into next week’s FOMC meeting unsure of how much the Fed will cut rates. The Fed likes to, and the market expects for the Fed to telegraph what they are going to do beforehand to lessen market volatility. As of yesterday, the market was pretty sure it was going to be a 25-basis point cut; with only a 15% chance of 50-basis points. But then, two articles were written about the hard decision between 25 and 50; first in the Wall Street Journal by Nick Timiraos at 1:03pm ET and a few hours later in the Financial Times by Colby Smith (tweet/X about it at 3:32pm ET.) Because these articles came out with the same topic around the same time suggests they were Fed leak-inspired. Since the articles were published, the odds of a 50-basis point cut have moved to nearly even (47.5%); see chart below.

I suspect the Fed wanted to nudge the odds more towards even to reflect a real possibility the Fed could cut 50 basis points next Wednesday. This was then emphasized when Bill Dudley, former president of the New York Federal Reserve, said in a speech at a conference in Singapore overnight, as described in a Bloomberg article,

“I think there’s a strong case for 50,” Dudley said on Friday at a forum organized by The Bretton Woods Committee in Singapore. “I know what I’d be pushing for.”

My call had been that, despite all I write that is coming, the Fed would side with precedent and consistency, cut the easier 25 basis points, and explain that the “data-in-hand” was not deteriorating enough to justify a “jumbo” cut. There is also an argument that the Fed doesn’t want to shock markets into wondering “what does the Fed see that I don’t see?” Other times where the Fed cut 50 basis points, there has been a clear crisis already taking place. Loretta Mester, former president of the Cleveland Fed, summarized this sentiment in yesterday’s Financial Times article,

 “An argument can be made for 50 [basis points] but the communications around that are complicated and there isn’t a compelling reason to take on that challenge,”

But then, there is also practicality, and a hallmark of the Powell Fed. The Fed should be cutting 50 basis points. To my happy surprise, and a step-forward for the Fed, there is a groundswell of activity suggesting the Fed has enough support to make policy about beyond what is visible; to rely on the consistent history of business cycle indicators (i.e. the Unemployment rate) to act forcefully with a 50-basis point cut before things get worse. The things I write about that a recession is coming are so clear and consistent, that it would be harder to argue a recession isn’t coming than one is at this point.

In an interview on PBS last Friday, the last FOMC voice we heard since the Fed’s blackout period began, Austan Goolsbee, president of the Chicago Federal Reserve, explained taking this leap into the future in an answer to PBS News Hour anchor Geoff Bennett’s question,

Geoff Bennett: There are some economists, some of whom we have spoken to on this program, who say the Fed is behind the curve. That rate cuts at this point, won’t help the economy in time, that any rate cuts need to be significantly larger. Where are you on that?

Austan Goolsbee: I think the hardest thing for a central bank ever, is to figure out exactly the timing. So, what we are trying to determine is “are we behind the curve?”, “are we on the curve?” What is to come is not just a backward looking thing. We don’t chat-gpt-style say, “well if the job market number is x, then that means y” at the next meeting. I think we’ve got to take seriously the idea, that if you look at the long arc of the data, its pretty clear what’s happened. Inflation has come way down, the job market has cooled, and if we do not start moving apace, and getting the rates back to something like normal, we are going to increasingly have problems on the real side of the economy.

And given the openness to cutting 50 basis points shown from Christopher Waller and John Williams last week, the great concern Powell has shown about the jobs market, and now these seemingly coordinated newspaper stories to move up the odds of a bigger cut, I think it is enough momentum to convince the rest of the FOMC voters that cutting 50 basis points is the right policy to address what is coming, even though it isn’t visible yet. Jerome Powell is the first Fed Chair I’ve known with enough eloquence to explain it at the press conference.