Economist predicts ‘sell-the-news’ event with Fed’s anticipated 25-basis-point rate cut

A potential 25-basis-point rate cut by the U.S. Federal Reserve next Wednesday is already priced into markets, and could lead to a "sell-the-news" event for risk assets, according to a prominent economist.

"A 25-basis-point cut is already anticipated by the market, which means the actual cut might underwhelm, triggering a sell-the-news response. In contrast, a 50-basis-point cut is not factored in. If it were to materialise it would probably give the market a lift," Johns Hopkins University economist Steve Hanke told The Block.

Ahead of the Federal Open Market Committee (FOMC) meeting on September 18, the CME FedWatch tool indicates that interest rate traders are pricing in a 57% probability of a 25-basis-point cut and a 43% chance of a 50-basis-point reduction. Notably, interest rate traders have significantly raised the odds of a 50-basis-point cut, with the probability rising from 13% to 43% over the past 24 hours.

Hanke, who previously led the Toronto Trust Argentina in Buenos Aires—the world’s best-performing fund in 1995—added that risk assets, including  bitcoin , could face heightened volatility in the coming months, in the lead-up to the  U.S. presidential election on November 5. Given the uncertain market conditions, he expressed a preference for fixed-income investments, such as the 10-year U.S. Treasury bond and gold.

21Shares Research Analyst Leena ElDeeb also observed that if the Federal Reserve chooses a 50-basis-point rate cut, it could be a market-moving event. However, ElDeeb added that it may also trigger investor caution, as it could signal that the Fed is responding to recessionary warning signs. "A more aggressive rate cut could shock the markets, given that it would ring alarm bells for a recession. Investors would trade cautiously to weather market conditions, which could hurt risk-on assets in the short term," ElDeeb said in an email sent to The Block.

Former NY Fed Chief Backs 50 Basis Point Cut