New Delhi

As the US Federal Reserve prepares for its upcoming meeting on September 17-18, analysts are closely watching the potential for a significant interest rate reduction. The possibility of a 50 basis points cut has sparked a mix of opinions among financial experts, with some arguing it could be a strategic move to bolster economic growth without alarming the markets.

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Understanding the market sentiment

Michael Yoshikami, CEO of Destination Wealth Management, has been a vocal advocate for the potential rate cut. During an appearance on CNBC's 'Squawk Box Europe,' Yoshikami suggested that a substantial reduction could be executed without causing undue panic in the financial markets. "That would be seen as a very encouraging sign that the Fed is taking necessary steps to bolster job growth. I believe the Fed is now prepared to take proactive measures," he stated.

This sentiment is echoed by Nobel laureate economist Joseph Stiglitz, who has argued that the Fed should implement a half-point interest rate reduction. Stiglitz believes that the previous tightening measures were perhaps too rapid and excessive, making a rate cut a necessary step to correct the balance.

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Market expectations are currently leaning towards a rate cut, although the magnitude of the adjustment remains uncertain. A recent disappointing jobs report has raised concerns about a weakening labor market, influencing traders to reassess their expectations for the cut size. According to the CME Group's FedWatch Tool, traders estimate a 75 per cent probability of a 25 basis points cut, with a 25 per cent chance for a 50 basis points reduction.

Despite these concerns, key economic fundamentals such as manufacturing and unemployment rates remain resilient. Thanos Papasavvas, chief officer at ABP Invest, noted that while there is growing anxiety about a possible economic slowdown, his firm is not particularly worried about entering a US recession. "We're not particularly worried about entering a US recession," he stated, emphasizing that the fundamental aspects of the economy are still strong.

Balancing fear and confidence

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However, not all analysts share the same optimism. Economist George Lagarias has warned that a significant rate cut could send a troubling message to the markets. "I don't see the urgency for a 50 basis point cut," Lagarias, chief economist at Forvis Mazars, told CNBC's 'Squawk Box.' He cautioned that such a move could convey the wrong message, potentially signaling urgency and creating a self-fulfilling prophecy of economic downturn.

Yoshikami, however, believes that concerns about an impending recession are exaggerated. He highlighted that both unemployment and interest rates are low by historical standards, and corporate earnings have remained robust. The recent market decline, which marked the S&P 500's worst week since March 2023, was attributed to "massive profits" accumulated the previous month. Despite a volatile start, August saw all major indices recording gains, while September is typically characterized by weaker trading activity.

The delicate balance of economic policy

As the Federal Reserve approaches its decision on rate cuts, market participants will keenly watch how the central bank will balance inflation and growth. Hence, the potential 50 basis points rate cut by the Federal Reserve is a topic of significant debate among financial analysts. While some see it as a necessary step to bolster economic growth, others caution against the potential risks.