A 25 bps cut is a better choice than 50 this week, says Roger Ferguson

Markets are anticipating a crucial Fed meeting, with discussions focusing on whether the Fed will implement a 25 or 50 basis point rate cut. While labor market weakness supports cuts, concerns over rising prices suggest a more cautious 25 basis point approach. The Fed is expected to emphasize its data-dependent stance, keeping options open for future meetings without pre-committing to a specific number of cuts.

The conversation also touches on controversies surrounding Fed officials, specifically concerning potential conflicts of interest and disclosure discrepancies. These issues, while creating a "swirl," are not expected to fundamentally alter the upcoming FOMC meeting's proceedings, though they do raise questions about the Fed's perceived independence. The committee's decision-making process may be complex, with the possibility of dissent from members who feel inflation isn't definitively moving towards the 2% target or who are concerned about structural labor market changes and the impact of AI.

Looking ahead, observers should pay close attention to the meeting's outcome, particularly any dissents, and the release of dot plots which will reveal the committee's internal divisions. Post-blackout period commentary from policymakers and incoming economic data, including CPI and PPI, will also be vital for understanding the Fed's future direction.

• The Fed is expected to cut rates by 25 basis points this week, rather than 50.
• The decision will be data-dependent, with future cuts contingent on incoming economic data.
• There is a possibility of dissents from FOMC members on both sides of the rate decision.
• Controversies surrounding Fed officials are creating a "swirl" but are not expected to impact the meeting's outcome.
• Key indicators to watch include the meeting's outcome, dot plots, policymaker commentary, and upcoming CPI/PPI data.

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Fed Rate Cut Expectations [00:10]

• Markets are gearing up for a critical Fed meeting this week.
• The central question is whether the Fed will implement a 25 or 50 basis point rate cut.
• Data suggests labor market weakness, but some price increases point towards a 25 basis point cut being a better choice than 50.
• If the data remains consistent, a series of 25 basis point cuts is anticipated for the year.

The prevailing sentiment is that the Fed will indeed cut rates this week, leaning towards a more conservative 25 basis point reduction due to a combination of labor market softness and some inflationary pressures. The speaker anticipates a series of such cuts throughout the year, provided economic data continues on its current trajectory.

"I think the data has come in uh you know reinforcing the notion of of labor market weakness but we're also seeing some spill over into higher prices which I think suggests 25 is a better choice than 50."

The Fed's Data Dependency and Future Guidance [00:49]

• The Fed Chair's press conference will likely emphasize that future meetings are "live."
• The guiding principle for future decisions will be the incoming data, reinforcing the Fed's data-dependent approach.
• The Fed will likely remain cautious, not closing the door on further cuts this year but not signaling them as definite.
• Each meeting will be treated as an independent decision, with data dictating the course of action.

The Fed is expected to communicate a commitment to data-driven decision-making, ensuring flexibility for future rate adjustments. While not explicitly promising additional cuts, the Fed will likely keep that possibility open, treating each upcoming meeting as a distinct opportunity to reassess the economic landscape.

"We want to be cautious. So, I don't think he's going to close the door on the possibility of more cuts this year, but I'm not sure that he's necessarily going to signal that it's a definite thing."

Inflation Data and the "Tame" Description [01:29]

• Some argue that a 50 basis point cut might be more likely if the Fed were strictly following the data, given weak job numbers and tame inflation.
• However, the expectation that inflation data could worsen is what keeps the Fed from cutting more aggressively.
• Recent data showed a headline inflation of 2.9% and core inflation around 3% annually.
• Describing this inflation level as "tame" is questioned, as the Fed seeks definitive evidence of inflation moving toward its 2% target.

A point of contention arises when describing the current inflation figures. While some might view them as tame, particularly in light of job market weakness, the speaker argues that inflation at 2.9% headline and 3% core doesn't fully align with the Fed's stated goal of seeing definitive movement towards their 2% target.

"So, I'm not sure I describe it as tame for an organization that says they want to see definitive evidence that data is that the inflation is moving to their 2% target."

Controversies and Their Impact on the FOMC Meeting [02:19]

• External "circus of headlines" include news regarding Steven Myron and Lisa Cook.
• These external events are not expected to fundamentally change the proceedings of the upcoming FOMC meeting.
• Steven Myron's announcement of leave from his White House role raises questions about the Fed's independence.
• Ambiguity persists around Lisa Cook's situation, but it's doubted she'll be removed from voting at this meeting.

Despite some highly publicized controversies involving Fed officials, it's believed these issues will not directly alter the decisions made at the upcoming FOMC meeting. The speaker expresses concern about perceived threats to the Fed's independence due to these situations.

"Unfortunately, you use the word that I hate to hear in association with the Fed, which is circus."

Lisa Cook's Property Disclosure Controversy [03:43]

• New evidence has emerged regarding Lisa Cook's property, with some documents indicating it was a vacation home, while it was listed as a primary residence on banking forms.
• This situation is described as "very confusing" and "very murky."
• The legal definition of "cause" and how it applies in court will be crucial in clarifying the situation.
• It's speculated that the ambiguity might stem from a vague recollection or the time it took to find relevant documents.

The controversy surrounding Lisa Cook's property disclosure remains a complex and unclear situation. The legal interpretation of key terms will likely determine the resolution, and further revelations are anticipated as the case progresses through the courts.

"So I think there's this is very murky unfortunately very murky."

Potential for Dissents at the Upcoming Meeting [06:02]

• There is a possibility of dissenting votes at the upcoming meeting, with members holding differing views on rate cuts.
• Some members might support a 50 basis point cut, while others prefer 25 basis points.
• A significant possibility exists for members who believe rates should not be cut at all.
• This dissent could arise from concerns that inflation is not definitively moving towards 2%, or from a perceived weakness in the labor force due to structural factors or immigration issues.

The upcoming meeting may see unusual divisions within the committee, with the potential for dissents on multiple fronts. Some members might advocate for more aggressive action, while others may urge caution due to persistent inflation or structural economic shifts.

"I think that's really a possibility here. Um, you know, the my earlier point about the dual mandate, inflation is not does not appear to be definitively moving towards 2%."

Key Factors to Watch Post-Meeting [07:50]

• The outcome of the meeting, specifically the presence and nature of any dissents, will be a primary focus.
• The "dot plots" (Summary of Economic Projections) will offer insight into the committee's internal divisions and future rate expectations.
• Following the blackout period, statements from individual policymakers will be important to monitor for further clues on their stances.
• Continued analysis of economic data, such as the next jobs report, CPI, and PPI, will remain critical.

Beyond the immediate rate decision, market participants should keenly observe the detailed projections and individual statements from Fed members. These elements, combined with forthcoming economic data, will provide a clearer picture of the Fed's evolving outlook and policy path.

"Um, I think this is a meeting where they're going to do the so-called SCP the dot plots. That'll be a chance for all of us to sort out exactly, you know, how fractious this committee is at this moment based on the data that comes in."