As the Federal Reserve prepares for its rate decision, Wells Fargo analysts urge investors to look beyond the debate over a 50 basis point (bps) versus 25bps cut, describing it as "noise."
Instead, the bank says investors should focus on the forward guidance provided by the Fed, which will help shape market expectations and guide investment decisions.
"The Fed needs to provide more certain communication on forward guidance," the analysts write, adding that clearer communication will enable individuals and firms to plan better and avoid the need for excessive accommodation later.
With market futures implying a 66% chance of a 50bps cut and a 34% chance of a 25bps cut, Wells Fargo notes that neither outcome would come as a shock.
"Afternoon fireworks [are] unlikely," they state, referencing the minimal market reaction to similar rate cut scenarios in 2001 and 2007.
One key metric to watch, according to Wells Fargo, is the 2-year U.S. Treasury yield.
"For this easing cycle, our advice is the same," they say, recommending investors track the 2-year yield to gauge the Fed's path. Depending on the Fed's approach, the federal funds rate could reach 3.875% by either January or May 2025.
Lower rate volatility, driven by a clearer Fed path, could benefit mortgage spreads and consumers, with Wells Fargo noting that this "should reduce uncertainty and ultimately spreads."
They highlight home improvement stocks such as Home Depot (HD) and Lowe's (LOW), which have begun to rally, suggesting the start of a "bigger move" for the sector.
The bank also dispels fears of a repeat of 2001 or 2007, noting that credit spreads remain tight and liquidity is abundant, indicating limited risk-aversion trade.