The Federal Reserve is set to lower interest rates on Wednesday for the first time in over four years, signaling a shift away from the restrictive policies used to curb inflation. However, there is still ongoing debate regarding the size of the cut.

This decision comes just under two months before a hotly contested U.S. presidential election. The Fed’s choice will likely hinge more on the message that Chair Jerome Powell and policymakers want to convey as they begin unwinding the highest interest rates in 25 years, rather than on immediate economic indicators.

A 50-basis-point cut, currently seen as having more than a 60% likelihood in futures markets, would show the Fed’s strong commitment to sustaining economic growth and job creation, a priority Powell has emphasized, especially with inflation nearing the 2% target.

Conversely, a 25-basis-point cut would align more closely with how the Fed typically starts easing cycles in non-crisis situations. This more cautious approach reflects the current economic data, which indicates a slowdown, though not an imminent recession.

Expert Opinions on the Upcoming Rate Decision

As the Fed prepares to make its first rate cut in years, analysts and strategists have weighed in on the potential size of the cut:

• Deutsche Bank: “We expect the Fed to reduce rates by 25 basis points at the September FOMC meeting. There are strong cases both for and against this move. Although there is a compelling argument for a larger cut, communications from the Fed before the blackout period and the available data don’t strongly support a bigger reduction.”

• ING: “We agree with the argument for quickly returning policy to a neutral stance and anticipate Fed Chair Powell will advocate for a 50bp cut. However, it remains uncertain whether other FOMC members are equally convinced. With the economy growing at 2.5-3%, unemployment low, inflation above target, and stocks at all-time highs, there could be significant opposition, making the outcome a toss-up.”

• Macquarie: “The calls for a 50bp cut are supported by data, particularly the weakening labor market. Hiring is declining, which could lead to a recession if the trend continues. While monetary easing can help reverse this, some FOMC members may see a 50bp cut as too aggressive for an economy not yet in recessionary territory.”

• Bank of America: “A 25bp cut would demonstrate that the Fed is maintaining control over its messaging. Powell could deliver a dovish statement emphasizing the Fed’s data-driven approach while keeping the option for larger cuts open in November if needed. This strategy could ease the Fed’s job in the long run, even if it causes short-term financial tightening.”