What a bigger-than-expected Fed rate cut would mean for the stock market

After a hotter-than-expected inflation reading on Wednesday, markets have quickly moved to price in a higher likelihood that the Federal Reserve will opt for a smaller, more conservative interest rate cut at its September meeting. A bigger reduction could send stocks reeling.

As of Wednesday, investors were placing the probability of the Fed lowering rates by 50 basis points at its meeting next week at just 13%, down from the 44% chance seen a week prior, per the CME FedWatch Tool.

Some strategists have said that a 25 basis point cut would be a more welcome sign from the Federal Reserve.

Yardeni Research chief markets strategist Eric Wallerstein reasoned the Fed likely wouldn't cut by more than 25 basis points "absent recessionary conditions or a financial crisis emerging."

Read more: What the Fed rate decision means for bank accounts, CDs, loans, and credit cards