Why is a 50 basis point rate cut considered a major positive?
First, it is an outdated idea to interpret a 50 basis point rate cut as a signal that the US economy is about to fall into recession. This argument is based on the assumption that the Fed has unfavorable information that the market does not yet know. However, the current weakness in the job market is an open secret, and the Fed does not need to reveal any new information to the market. Therefore, the focus of the Fed's actions is on how to deal with the current situation, rather than what to tell the market.
Second, if the Fed only cuts interest rates by 25 basis points, it may evoke the market's painful memories of March 2022. At that time, facing the pressure of high inflation, the Fed only raised interest rates by 25 basis points. This conservative move failed to effectively deal with inflation, which led to a setback in market confidence and triggered large-scale market turmoil. This memory may make the market extremely sensitive to the interpretation of subsequent data. Moreover, since the Fed has no scheduled meeting in October, it means that they cannot make timely policy responses to new data. Powell is obviously aware of this, and he will not allow the mistakes of 2022 to happen again.
Therefore, the 50 basis point rate cut is not only a timely response to the current economic situation, but also to avoid market misunderstanding and overreaction to the Fed's policies. This decision demonstrates the Fed's sensitivity to market dynamics and its commitment to economic stability.