Investors are anticipating a Federal Reserve rate cut in September, but the magnitude of that cut remains uncertain, with many investors leaning towards a 25 basis point reduction. ING Chief International Economist James Knightley joins Morning Brief to share his outlook on the potential rate cut.

Knightley favors the idea of a 25 basis point cut, noting that despite better-than-expected inflation data, "the natural caution of the Fed may creep in." He explains that the justification for a 50 basis point cut would depend on the jobs numbers. With the Fed's primary goal being a 2% inflation target, Knightley emphasizes that they are not waiting for inflation to hit exactly 2% before considering a rate cut, stating that "they're starting to focus more on the second pillar of maximizing US employment."

As economic indicators suggest an overall healthier economy, Knightley points out that Fed Chair Jerome Powell will need to address this at the upcoming Jackson Hole meeting. "I think they will have to certainly move in terms of the commentary. So I think it will be, one, acknowledging inflation has slowed, perhaps a little more quickly than they had been thinking, and that the jobs market may be slowing a little more rapidly than they had been believing would be the most likely case," Knightley states, adding this dynamic may prompt a series of rate cuts.

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This post was written by Angel Smith