The Federal Reserve is expected to signal on Wednesday that it plans to implement larger interest rate cuts in the future, according to analysts at Citi.
The Fed is widely expected to cut rates for the first time since March 2020 after their latest two-day meeting ends, which will lower borrowing costs from a two-decade high of 5.25% to 5.5%.
However, there is uncertainty about the size of the reduction that will be done. According to CME Group's closely monitored FedWatch tool, the chance for an aggressive reduction of 50 basis points versus the traditional reduction of 25 basis points is at 65%.
Expectations that the Fed will implement massive tapering have risen in recent days, fueled by reports in the Financial Times and the Wall Street Journal that such a move remains a possibility. Meanwhile, former New York Fed President Bill Dudley has stated that there are "strong reasons" for a larger reduction, arguing that the cost of borrowing is currently much higher than a neutral rate that does not restrict or stimulate economic activity.
In the last data before the announcement, US retail sales unexpectedly rose in August, showing consumer resilience. These trends, along with mixed inflation numbers and slackening labor demand, may make things more complicated for Fed officials.
In addition to the expected tapering, the Fed's announcement will also include a fresh look at rate projections by policymakers, an update on official statements, and a press conference with Chairman Jerome Powell.
Traders are likely looking for any indication of how the Fed will approach this tapering cycle, with markets currently expecting at least a 100 basis point tapering by the end of 2024.
"Regardless of the size of the reduction, we expect a dovish-leaning meeting with Powell providing guidance towards a larger reduction at the next meeting," Citi analysts said in a note to clients.
They added that while the retail sales figures were stronger than economists had expected, details in the report including a drop in restaurant spending raised concerns about a "developing economic slowdown."
