In a matter of days, the urgency the Federal Reserve faced in cutting interest rates has diminished considerably.

At the beginning of the week, there was even talk of the possibility of an emergency cut before the next meeting. Markets were almost certainly betting that the Fed would cut benchmark rates by at least half a percentage point.

Change of Perspective in the Markets

However, the situation has taken a turn. Now, markets are divided between the possibility of a quarter-point or half-point cut. This is due to growing confidence that the economy is not headed for an imminent recession, and that the Federal Reserve has not lagged behind in its economic response.

“I expect a slowdown that will lead the Federal Reserve to ease monetary policy, but the market's initial reaction was to think the economy was already contracting,” said Steven Wieting, chief economist and strategist at Citi Wealth.

Wieting anticipates the labor market will slow further, but notes that growth remains supported by fiscal stimulus, and consumers are still in relatively good position. “We don't usually see recessions under these conditions, unless a new shock occurs,” he explained.

Economic Data That Impacts Expectations

The panic began on August 1, fueled by an unexpected spike in layoffs and a weak ISM manufacturing index report. However, a Labor Department report on Thursday showed a decline in jobless claims, and another ISM report highlighted better-than-expected growth in the services sector.

Due to this data, the probability of a 50 basis point cut in September, which was 85% on Monday, fell to 54% by Friday, according to the CME Group's FedWatch index. Markets are now pricing in a 68% chance of a full percentage point reduction by the end of 2024, although this figure is also down from Monday's near-certainty of a 1.25-point cut.

Experts on the Fed Policy Debate

Wharton professor Jeremy Siegel has been one of the strongest voices in favor of an aggressive taper by the Fed, and on Monday he called for an emergency cut. However, even he has changed his tone, now only urging the Federal Reserve to ease monetary policy as soon as possible, although he no longer sees the need for an immediate cut between meetings.

“I don't think things are collapsing. The sooner they can get the rate below 4%, the better,” said Siegel, who is also chief economist at Wisdom Tree.

The Federal Reserve has kept the benchmark rate in a range of 5.25% to 5.50% for more than a year. Recently, Jerome Powell and other officials have signaled that they are open to cutting rates, although they have not specified when or to what extent.

Finally, with recent changes in market expectations and more favorable economic data, the Federal Reserve faces less pressure to make an immediate interest rate cut. While some experts continue to advocate for looser monetary policy, current circumstances suggest the Fed may opt for a more cautious approach in its upcoming decisions.