Bank of America analysts weighed in on the potential impact if the Federal Reserve opts for a 50bps rate cut, highlighting how it could lead to significant rate repricing.
According to BofA, "today's decision will be a surprise either way" as the market currently prices in roughly equal odds of a 25 or 50bps cut.
The analysts stress that the market's reaction will depend on two main factors: the pace of future cuts and the terminal rate.
BofA explains that "2y rates are much more sensitive to the pace while 10y rates are more dependent on terminal."
The terminal rate, currently at 2.8%, sits at the upper end of the Fed's neutral range of 2-3%. BofA explains that this suggests that while inflation concerns are easing, risks to jobs are growing, leading markets to price in a "soft landing" scenario.
A key consideration, BofA notes, is that the market's view of the terminal rate need not be neutral, as it could shift based on whether investors expect a looser or tighter Fed depending on the prevailing risk outlook.
"Terminal need not be "neutral" as markets may choose to price a loose or tight Fed depending on the risk outlook expected to prevail," the bank states.
The analysts also highlight that while the Fed may hang at the top of the neutral range for an extended post-cut period, similar to the 2018 stopping point, today's decision "could lead to a significant rate repricing depending on the size of the rate cut and the communication."
They add: "Our house call remains for a 25, and yesterday's data appears favorable for that call. Markets price 4.5 cuts for this year across 3 remaining meetings."