Citigroup Chief Economist: The Federal Reserve will cut rates by 25 basis points for the first time

Steven Wieting, Chief Economist, Chief Investment Strategist, and Interim Chief Investment Officer at Citi Wealth Management, believes that the most likely outcome of this week's Fed rate decision is a 25 basis point cut, but he emphasizes that no one can know for sure what the Fed will do. He said, "We expect a 25 basis point rate cut, but if Fed officials want to do it faster, we would also accept a 50 basis point cut, and if they are willing to act quickly, they can cut rates quickly." However, Wieting pointed out that the history of Fed rate cuts shows that when adjusting monetary policy to adapt to the current economic situation, the central bank will cut rates by 25 basis points; and when the economy is on the brink of recession, the Fed usually makes larger rate cuts. He said, "This is the really important part. We do not believe the economy is on the brink of collapse. However, could the current monetary policy lead to unnecessary economic slowdown? We think it could. That's why action is needed." While investors have been focused on debating the magnitude of the Fed rate cut, Wieting believes this is not the most important factor for the market. He said, "This is indeed a tactical issue, but it will not have a significant impact on the ultimate outcome. Of course, this will not tell us about the economic situation, which is what everyone wants to know." Wieting noted that because he expects the Fed to cut rates by 200 basis points by mid-2025, a rate cut of 25 or 50 basis points at this meeting will not change the game. He believes timing is crucial. Continued rate cuts mean that Powell's tone in his speeches and the Fed's long-term rate outlook will be more important than the short-term decision to cut rates by 25 or 50 basis points. Powell has in the past changed the market with just a few words, including his statement at the August Jackson Hole annual symposium that "it's time to cut rates," leading to new highs in the US stock market in less than a week. Wieting pointed out, "Powell effectively implemented easing at Jackson Hole—guiding the rate path downward, explaining what the Fed is doing, and embedding this impact in the market." While Powell's dovish remarks hinting at more rate cuts in the future may benefit the stock market in the short term, and hawkish remarks may lead to the opposite result, the economy and corporate earnings will determine the market's direction over the next year. Upcoming economic data—jobs reports, retail sales reports, etc.—will be crucial. Wieting emphasized, "I think that for financial markets, the potential economic conditions in the US will be more important than the Fed's tactics at a specific moment. We are just slightly adjusting the possibility of the timing of rate cuts, but it's really not that important." However, Wieting does believe that a shift in investor expectations for rate cuts could lead to increased market volatility in the short term. He said, "This could be a problem."