The iShares 20+ Year Treasury Bond ETF (TLT) experienced a significant surge on Monday, climbing above $101 per share to its highest level since July 2023. This surge reflects growing investor anticipation of an imminent interest rate cut by the Federal Reserve.
The Federal Open Market Committee (FOMC) is scheduled to meet on Sept. 18, and while a rate cut is practically guaranteed, the magnitude of the cut remains a subject of debate. According to probabilities derived from fed futures, tracked by the CME FedWatch tool, there’s a 61% chance of a 50-basis-point rate cut, bringing the federal funds rate down to a range of 4.75-5%. However, there’s also a 39% chance of a smaller, 25-basis-point cut.
This uncertainty has spurred a divided opinion among financial experts. Top financial media outlets are leaning towards a more aggressive 50-basis-point cut, arguing that current interest rates are overly restrictive given the state of inflation and the labor market.
On the other hand, Wall Street analysts and major banks, including Goldman Sachs and Bank of America, are advocating for a more modest 25-basis-point cut. Bank of America has indicated that a “weak retail sales report” on Tuesday could shift the balance towards a larger cut, as it would signal weakening consumer spending and potentially prompt the Fed to provide more robust economic support.
Goldman Sachs economist David Mericle, however, expressed that a larger cut would be “somewhat out of keeping with usual Fed practice,” highlighting that such significant cuts are typically reserved for pronounced economic crises or substantial spikes in unemployment.
Veteran Wall Street investor Ed Yardeni also weighed in on the debate. He acknowledged that a 50-basis-point cut is often the starting point for an easing cycle but emphasized that the current economic circumstances are unique. “There’s no recession clearly barreling toward us,” he stated.
Yardeni expressed concern that a larger cut could fuel stock market gains, potentially leading to an asset bubble similar to the dot-com era. He suggested that a 25-basis-point cut would be sufficient for now, pending the release of further economic data.
The Federal Reserve’s decision will have a significant impact on the financial markets and the broader economy. The debate over the size of the rate cut underscores the complex and dynamic nature of economic policymaking in an uncertain environment.
