Fed Decision Looms as Markets Debate 25 vs. 50 bp Cut

Investors are bracing for one of the most finely balanced Federal Reserve meetings in recent memory, with the CME FedWatch tool showing an even split between expectations for a 25-basis-point or a 50-basis-point rate cut. The decision will be announced on Wednesday, with markets preparing for heightened volatility.

Case for a Bigger Cut

Former New York Fed President Bill Dudley has added fuel to speculation of a larger move, arguing that the federal funds rate may currently sit as much as 200 basis points above its neutral level. According to Dudley, such a gap risks overtightening, making the case for a more aggressive 50 bp cut to bring policy closer to equilibrium.

Analysts Remain Cautious

Despite that argument, most major institutions remain cautious. Bank of America analysts assign only limited probability to a half-point cut, warning that the Fed may prefer to keep ammunition in reserve. UBS economist Brian Rose acknowledges the possibility of a larger move but emphasizes that his base case remains a more measured 25 bp cut.

Market Implications

The split underscores deep uncertainty in both policy circles and markets. A 25 bp cut would likely reassure investors that the Fed is committed to a gradual path, while a surprise 50 bp cut could trigger sharp moves across the U.S. dollar, equities, and Treasury yields. Traders are already positioning for volatility around Wednesday’s announcement and Powell’s press conference that follows.