Fed Rate Debate : 25bps or 50bps? CPI, PPI, and Market Volatility Loom

Fed Rate Debate: 25bps or 50bps? CPI, PPI, and Market Volatility Loom 

After a generally quiet week following payroll data, markets are now focused on the upcoming Fed decision, with debate intensifying between a potential 25 basis point (bps) and 50 bps rate cut. According to Jim Reid from Deutsche Bank, even though the Fed has entered its media blackout ahead of next Wednesday's expected rate decision, market volatility may persist as investors weigh the chances of either option. The prevailing sentiment leans toward a 25 bps cut based on prior Fed communications. However, if 50 bps becomes a possibility, hints from the press may emerge closer to the decision.

Key U.S. economic indicators this week include Wednesday's CPI report and Thursday's PPI, which could influence the rate debate, but employment figures seem to be a bigger focus. Friday's employment report provided arguments for both sides of the rate cut discussion, suggesting the Fed's decision may hinge more on labor market conditions than inflation data.

Aside from inflation and employment, major global events include Tuesday's U.S. presidential debate and the European Central Bank's (ECB) meeting on Thursday, where a 25 bps cut is anticipated. Though the election has taken a backseat in market discussions since Kamala Harris replaced Joe Biden as the Democratic candidate, Donald Trump has gained an edge in betting markets. As polling day approaches in two months, election-related discussions are likely to become increasingly relevant alongside concerns over U.S. recession risks.

On the economic calendar, several notable data releases are expected, including the NFIB small business optimism survey, UK employment data, China trade figures, and various U.S. Treasury auctions. For Wednesday's CPI report, Deutsche Bank forecasts slight increases in both headline and core inflation, with headline CPI expected to fall 30 bps year-over-year to 2.6%. A modest rise in rents may continue to draw attention. Thursday's PPI is expected to post similar gains to CPI, with a focus on sectors affecting the core PCE deflator.

The week concludes with Friday's University of Michigan consumer sentiment survey, offering another pulse on U.S. economic conditions before the Federal Reserve's meeting next week.