On Wednesday, the Fed will answer your questions about life, the universe and everything. Or at least about the size of the cycle’s first rate cut and the Committee’s outlook for policy now that inflation’s back on the right path and the US labor market’s evidencing the kind of deceleration Jerome Powell pledged last month to forestall.

As of this writing, the 25 versus 50 debate‘s still live. The size of this week’s cut remains a coin toss. My guess is the Fed will send out more smoke signals through its preferred financial media outlets between now and the decision. I’d be surprised if traders go into Wednesday afternoon no more “informed” than they are currently.

Powell’s likely leaning towards 50, and my guess is he spent the last several days trying to marshal support among his colleagues for a half-point move, or maybe it’s more accurate to suggest he sounded them out on it. Don’t be surprised if the Wall Street Journal or the FT tips the Committee’s hand early this week, which is to say there’s a decent chance the media gives markets a heads up if 50’s on deck. If there’s radio silence instead, 25 it (probably) will be.

I’ve spilled copious amounts of digital ink editorializing around the pros and cons of 50 versus 25 (or 25 versus 50) in recent weeks. I think there’s a strong case for 50 and by making it clear, through the media last week, that 50 was still up for consideration with just days to go before the decision, the Fed has to be cognizant of its reflexivity with the market.

The median projection for the 2024 UNR in the March and June SEPs was 4.0%. The jobless rate was three-tenths above that in July and two-tenths in August. The median projection for 2024 core PCE was 2.8% in the June SEP. Actual core PCE is 2.6%. So, unemployment’s higher than the median projection from the last SEP and core inflation lower. That’s a simplistic lens, but it underscores the notion that risks around the dual mandate are indeed more “balanced.”

In the June SEP, the long run dot (i.e., nominal neutral looking out at least a few years) shifted 20bps higher. Let’s say long-term r-star is 0.75%. To account for the lingering distortions from the pandemic, the war, fiscal excess and so on, let’s add 50bps to that and call short-term r-star 1.25%. Add headline PCE to that and you get 3.75%. EFFR is 5.33%. The Sahm rule’s triggered and the three-month moving average for private payrolls is down to 97,000 from 187,000 in January. You can make the case for 50bps this week.

The bottom line is this: 25bps is table stakes. A Fed that cuts 25bps this week isn’t a Fed that’s engaged in risk management. It’s a Fed doing the bare minimum. In my view, that’s a Fed asking to find itself behind the curve. Again.

Anyway, the Fed may want to pick a new adjective to describe job gains in the new statement. “Moderated” (the language from the July statement) feels insufficient, but it’ll still work if the Committee’s feeling lazy in the creative writing department. The same’s true of the language around the unemployment rate. In July, UNR had “moved up” but “remain[ed] low.” That’s still the case, but the Fed would be remiss not to allude somehow to the unexpected two-tenths increase the BLS reported less than 48 hours after the July policy decision.

The inflation language from July still works, I think. It (inflation) has “eased over the past year but remains somewhat elevated” and “in recent months, there has been some further progress toward the Committee’s 2% objective.” The Fed will reiterate and emphasize that the risks around the dual mandate have shifted. In light of Powell’s explicit Jackson Hole remarks around the Fed’s inclination to guard against any additional softening that could presage job losses, the September statement may include some reference to labor market downside.

The new dot plot has the potential to be messy. As widely discussed in recent days, tipping 100bps of total easing for 2024 and only cutting 25bps at the September meeting puts Powell in a very tough spot during the press conference. Put as a question: If the “median” official thinks one of the year’s remaining three meetings will result in a 50bps cut, why wasn’t that meeting September’s? Alternatively, the Fed could cut 50bps this week and tip 75bps for the year, but implicit would be the notion that the Committee doesn’t really see a lot of urgency on the macro front, which then raises the “Why 50 now?” question. I think that’s easily answered: “Because we’re tying to proactively manage risks rather than respond after the situation’s already deteriorated.” But notwithstanding their avowed affinity for being proactive, the Fed’s actually terrified of preemptive action.

In the SEP, the unemployment rate projection will need to move up (mark to market), and the core PCE projection for this year might move down a tenth or maybe even two tenths back to March’s 2.6% median.

What the Fed shouldn’t do in my opinion is cut 25bps and then tip two more 25bps moves for the rest of the year, which is to say 25 at this meeting, 25 in November and 25 in December (25 on Wednesday with 50 more could mean a pause in November and 50 in December, but that’s not how the market will read it). Of course, that’s the chalk outcome if you’re an economist. 25, 25 and 25 through year-end is the consensus. And I think the Fed would do well not to validate it.

I should clarify: If that — i.e., 25 this week, 25 in November and 25 in December — turns out to be prudent, that’d be fine. Better than fine, even. Indeed, there’s a very real sense in which that’s ideal given it seems to assume a kind of best-case macro glide path. But you shouldn’t assume the best case. If you have to choose between assuming the best and assuming the worst, you should go with the latter every time, depressing as that sounds.

As someone adept at “feeling the market” (as a former president once put it, while excoriating Powell on social media), I’m confident in assessing that a “25 today and 50 over the next two meetings” outcome on September 18 would be viewed by a lot of market participants as generically bland, tone deaf, insufficiently nuanced and, possibly, marginally hawkish in a dumb sort of way.

It goes without saying that 25bps this week and then a dot plot that telegraphs just 25bps for the balance of the year would be received very poorly, which is to say overtly hawkish. That’s the least likely rates-dots outcome, in my view. If that somehow comes to pass, you can look for dollar strength, a sharp curve flattener (if a hawkish front-end reset doesn’t get you, hard landing bets via long-end buying will) and lower stocks.

Finally, the Fed will want to telegraph a wind down for QT. If not this week, then certainly in November.

If I were Powell, I’d push for 50bps now, pared with an announcement that QT’s over (or set to end) and a dot plot that tips one additional 25bps cut for 2024. That checks every box you need to check if you’re the Fed. You’ve demonstrated a willingness to proactively manage risk with an outsized first cut, you’ve telegraphed no inclination to panic by tipping just one additional quarter-point move for the balance of the year and you’ve made it clear that you don’t want to push your luck when it comes to the (fuzzy) LCLoR math or stumble across the (blurry) line between “abundant” and “ample” without realizing it.

But what do I know, right?