As a result, Wall Street leaders no longer discuss If The Fed will lower interest rates, it is just a matter of how much. Some argue that Fed officials will opt for a smaller rate cut of 25 basis points because most economists believe the economy is still far from a recession. But others, including some Fed officials, have said that a 50 basis point rate cut is the best option to prevent further weakening of the labor market after years of high borrowing costs.

Steven Wieting, a renowned financial expert who serves in many roles at Citi Wealth, including chief economist, chief investment strategist and acting chief investment officer, believes a 25 basis point rate cut is the most likely outcome this week, but stresses that no one can know for sure.

“We were looking for 25, but we would certainly take 50… if they want to do it faster, they can,” he said Assetsand added: “They might decide, ‘Hey, if we can be fast on the way up, we can be fast on the way down.'”

Wieting pointed out, however, that the Fed’s “historical tendency” is to cut rates by 25 basis points whenever it is simply adjusting its monetary policy to current economic conditions, as is the case this week. Larger rate cuts, on the other hand, are usually reserved for times when the economy is on the brink of recession.

“And that’s what’s really important here. The underlying context is that we don’t think the economy is on the verge of collapse,” he said. “But will (current) monetary policy interact and cause a more severe slowdown than necessary? We think that will be the case. That’s why (the Fed) needs to act.”

While investors are focused on the debate over the size of the Fed’s rate cut in September, Wieting argues that this is not the most important factor for the markets.

“It’s really a tactical question. And it really won’t play a big role in where they ultimately go. And it certainly doesn’t tell us anything about the state of the economy, which is what everyone wants to know,” he said.

Wieting noted that he expects 200 basis points of rate cuts (a two percentage point drop in the benchmark rate) by mid-2025, so the Fed’s decision to cut rates by 25 or 50 basis points at this meeting will not be a game-changer. There will be significant rate cuts, it’s just a matter of timing, he predicted.

With the prospect of continued, economy-stimulating rate cuts, the tone of Powell’s statement and the Fed’s longer-term rate outlook will be more important than the short-term decision of 25 or 50 basis points. Fed Chairman Jerome Powell has demonstrated his ability to move markets with few words in the past. For example, at the Fed’s annual Jackson Hole symposium in August, he said that “the time has come” to cut rates, sending stocks soaring to then-record highs less than a week later.

“He was able to deliver effective easing in Jackson Hole – direct the interest rate path downward, explain what the Federal Reserve is doing, and anchor those effects in the markets,” Wieting noted.

But while dovish comments from Powell hinting at further rate cuts could benefit stock prices in the short term, while more aggressive comments could push them in the other direction, it is the economy and corporate earnings, not the Fed, that will determine the course of markets next year. Upcoming economic data — jobs reports, retail sales and the like — will be crucial.

“I think the underlying economic conditions are going to be much more important to financial markets than the Fed’s tactics at any given time,” Wieting stressed. “The possibility that we might just slightly delay the timing of those rate cuts … really doesn’t matter much.”

However, Wieting argued that changing investor expectations about rate cuts could lead to increased volatility in the short term. “And that could be a problem,” he said.

The answer to volatility is “quality” – and maybe a little income

Most assets, including stocks and bonds, are extremely sensitive to rate cut expectations, which could lead to large swings in trading volumes that can amplify price movements. Wieting recommends investors look for “quality stocks” to outperform in the upcoming, potentially volatile rate cut cycle. These are companies with solid balance sheets, low debt levels and consistent earnings that allow them to generate consistent returns even in difficult times.

In particular, he argued that Dividend Aristocrats could perform better in the future. S&P 500 companies that have increased their dividend for 25 consecutive years are given this title, illustrating their ability to generate consistent profit and their willingness to return value to shareholders.

Dividend Aristocrats have underperformed the S&P 500 this year, but Wieting noted that they have a decades-long history of outperformance, making them a good option for investors looking to mitigate upcoming volatility.

“The strategy against uncertainty is to increase quality. If a company has the discipline to increase its dividend every year, in some cases 25 years in a row, it limits the companies with poor balance sheets. In fact, it limits some riskier industries – cyclical, capital-intensive industries like automotive tend to fail. That’s a strategy that has performed better than the market,” he said.

Wieting also pointed out that the healthcare sector is a profitable defensive investment for investors, arguing that it can make sense to earn additional income through the bond market. Although bond yields have fallen from their peak, there are still many attractive options in the fixed income space for investors who are a little less willing to take on risk.

“The pillars of investing are growth and income. Now income has improved significantly through the tightening cycle. Have we reached the peak of bond income? No. But you can still certainly build an income portfolio with a 5% yield,” Wieting said. “And what you’re doing is dampening your volatility for the risks you’re willing to take.”

While it might make sense to build defensive income in a portfolio, Wieting believes that despite their rise, U.S. stocks are actually less risky than they were earlier this year. He noted that after big tech stocks drove much of the market rally in 2023, nine of 11 sectors of the S&P 500 posted rising earnings this year. This expansion in earnings growth, which continues to this day, is a sign that the economy is far from a recession. Wieting forecasts strong 9% year-over-year earnings per share growth for the S&P 500 in 2024.

“The economy is not following the rules”

Many investors have predicted that an economic crash would throw markets into chaos, but Wieting doesn’t believe that. He argues that the U.S. economy has already experienced a rolling recession in recent years — where some industries shrink while others grow — making forecasting difficult and confusing for investors.

“There are so many people expecting a boom or bust, but there’s nothing V-shaped here. There are moving parts, it’s an economy that’s in a bit of a recession, in manufacturing, in housing, but we’ve had very strong results in investing in technology and that’s continuing,” he said. “It’s a more complicated story … the economy doesn’t play by the rules.”

Wieting noted that there are risks to markets in 2025, citing the election as an example, but he believes corporate profits should continue to rise as the economy avoids a real recession.

Although some investors are getting nervous with stock prices near record highs while the job market is cooling, he also stressed that it always pays to stay invested. As the old saying goes, trying to find the right time to enter and exit the market is a futile exercise.

“If you want to participate in economic development and rising living standards, you have to participate with equity. I think you have to have some risk tolerance. You can decide how much downside risk you want to take in your portfolio, and you can have some safe assets and some growth assets – some income and growth. That sounds daunting, but one of the alternatives is that you will lose most of your value, most of your wealth, to inflation,” he warned.