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These are the best days for armchair US interest rate managers.

The conclusion of Wednesday’s policy-making meeting exposes the Federal Reserve to criticism from all sides. That it will cut rates is beyond doubt – it has laid the groundwork for its first cut since the pandemic very thoroughly. But whether it will make the typical quarter-percentage point cut or half-percentage point cut is a subject of heated debate in investment firms, on trading floors and in the nerd corners of newsrooms.

“The obsession was as if it was the end of the world,” said Salman Ahmed, head of macroeconomic and strategic asset allocation at investment firm Fidelity. “It feels like the market is putting pressure on the Fed.”

The case for lowering the current target range of 5.25 to 5.5 percent by a quarter of a percentage point is fairly simple. Inflation has fallen back to the Fed’s target, the labor market is cooling but not imploding, so it’s time to ease off the brakes a bit, in the usual steps.

The “go large” team points out that Fed Chairman Jay Powell himself opened the door to a debate over the size of rate cuts over the summer when he spoke about the “pace” of easing at the Jackson Hole symposium. Only recently have very serious people like former New York Fed President Bill Dudley made the case for a half-percentage-point cut. Rate traders have taken note and gone from firmly expecting a small cut to a good chance of a big cut.

The danger for the Fed is that it could panic. On paper, a high interest rate suggests that rate-setters fear they are too late to prevent a recession. They suspect they made a mistake by keeping rates at their highest levels in decades for so long, and that they need to back off quickly.

This time, however, the markets have taken the idea of ​​such a big drop in their stride. If it doesn’t scare the markets, then why not open with a bang?

The collective wisdom of the markets actually seems to be trying to force the Fed to act. A double rate move, especially as the first step in an easing cycle, is usually an indication that investors expect a recession to come, especially given that interest rate markets are pointing to further large rate cuts next year.

But polls suggest that investors don’t believe that at all. They are either bluffing on this point or, more charitably, hedging against adverse scenarios. Bank of America’s regular survey of fund managers this week found that only 11 percent of investors believe the U.S. economy is headed for a hard landing. A full 79 percent still expect a gentler slowdown. Once again, interest rate markets are showing their excitability.

The immediate challenge for the markets is Powell’s communication skills, which will be severely tested in the back and forth of the post-meeting press conference.

Would it be a nervous half-percentage point cut to avert disaster, or a jubilant half-percentage point cut to declare victory over inflation? Would a quarter indicate that the central bank is still afraid of inflation and too stubborn to be bold? The online army of Fed perpetual critics are cracking their knuckles in anticipation.

The risk of sharp market movements is high here. A series of sharp shocks over the summer highlighted “hypersensitive” market conditions, according to a report this week by the Bank for International Settlements, a think tank of the major central banks.

But all this excitement obscures an important, broader point, which is a shift in the global asset pecking order. The Fed usually sets the tone for global monetary policy. Now, however, we have a U.S. economy that is slowing – not crashing, but slowing – to move more in line with global peers. “One important theme is fading U.S. exceptionalism,” said Sam Lynton-Brown, global head of macro strategy at French bank BNP Paribas. “That means the extent to which U.S. (bond) yields are outperforming peers, growth is outperforming peers and U.S. assets are outperforming peers is likely to decline.”

It’s also a distraction – a fun one, but a distraction nonetheless – from the debate over where the bottom of interest rates is and from much more pressing issues. “Once the Fed is over, there’s the risk of elections, recessions or, not to mention, inflation could return,” said Fidelity’s Ahmed.

What will be at stake then will dwarf today’s breathless speculations about the narcissism of small differences.

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