By Johann M Cherian and Purvi Agarwal
(Reuters) -Wall Street’s main indexes were set for a slightly higher open on Wednesday as the Federal Reserve was widely expected to deliver its first interest rate cut in more than four years, with most investors betting on a 50-basis point reduction.
Borrowing costs have stayed at their highest levels in over two decades since July 2023, when the central bank last hiked interest rates by 25 basis points to between 5.25% and 5.50% to combat inflation. But the focus recently has been more about a moderating labor market.
At 8:41 a.m. ET, Dow E-minis were up 66 points, or 0.16%, E-minis were up 10 points, or 0.18% and E-minis were up 48 points, or 0.25%.
Futures linked to the index, tracking small caps which tend to fare better in a lower interest-rate environment, slipped 0.11%.
The benchmark S&P 500 and the blue-chip Dow both recovered from an early August rout to clinch intraday record highs in the previous session, after a batch of data hinted at a still-robust economy ahead of the Fed decision, expected at 2:00 p.m. ET.
Economic indicators over the previous one month have been relatively mixed, making investors nervous ahead of the least predictable Fed decision in years.
Following dovish commentary from present and former Fed officials recently, traders are now pricing in 63% chances of a bigger 50-basis-point reduction, according to the CME Group’s (NASDAQ:) FedWatch tool.
Analysts, however, caution that an outsized move from the central bank could spook markets, which are already nervous about the overall health of the world’s biggest economy.
Bets for a smaller 25-bps cut have now slipped to 37% from 86% a week ago. Investors will also be watching for comments from Fed Chair Jerome Powell at 2:30 p.m. ET to gauge the central bank’s stance on the economy and prospects of further rate cuts this year.
“Rarely has the market been so torn, so close to a Fed decision. Most macro watchers believe the ongoing strength of the economy justifies a 25 bps cut,” said Seema Shah, chief global strategist at Principal Asset Management.
“Furthermore, history suggests a 50 bps cut is more likely in times of severe financial stress or major job losses – neither is present today.”
Markets have rallied this year, with all three major indexes setting record highs on prospects of lower interest rates as inflation moderated and the jobs market showed gradual signs of cooling.
Stock options are pricing an about 1.1% swing, in either direction, for the S&P 500 after the verdict on Wednesday, according to options analytics service ORATS.
Heavyweight growth stocks edged higher in premarket trading. Alphabet (NASDAQ:) added 0.9%, while Meta (NASDAQ:) rose 0.5%.
Among top movers, Intuitive Machines jumped 54% after clinching a $4.8 billion navigation services contract from NASA.
General Mills (NYSE:) fell 2.7% after the Cheerios maker posted first-quarter results.
Sirius XM Holdings (NASDAQ:) gained 2.5% after Guggenheim upgraded the radio company’s stock to “buy” from “neutral”.
On the data front, housing starts stood at 1.356 million in August, compared to estimates of 1.31 million as per economists polled by Reuters.
