The US Federal Reserve is expected to cut interest rates (Fed Interest Rate) on Wednesday for the first time in four years, reversing the restrictive measures it had put in place to control inflation. However, there is ongoing debate about the size of the rate cut.
Their decision on how to begin this easing cycle – less than two months before a contested US presidential election – will likely depend more on the message Chairman Jerome Powell and Fed policymakers want to send, as they are driven by the highest interest rates in 25 years, rather than immediate macroeconomic concerns.
A half-percentage-point cut, now seen as a more than 60% chance in futures markets, would signal the Fed’s commitment to keeping economic expansion and job growth, which Powell has highlighted as a priority, with inflation to approach the 2% target.
On the other hand, a cut of a quarter of a percentage point would be more in line with how the Fed typically begins its easing cycles outside of a crisis. This approach would reflect the cautious stance of policymakers and align with economic data that point to a slowdown, though not an imminent recession.
What strategists are saying about the upcoming rate decision
As previously reported, the Fed will implement its first rate cut in years on Wednesday, but the size of the move has been the subject of debate in recent weeks.
Here’s what some strategic analysts have been saying ahead of September’s Federal Open Market Committee (FOMC) meeting.
Deutsche Bank: “We expect the Fed to cut interest rates by 25 basis points at the September FOMC meeting. There are strong arguments for and against this action. While there is a compelling risk management case for a bigger move, the Fed’s pre-blackout announcements and the balance of data do not clearly argue for a bigger taper.”
ING: “We fully buy the case for a quick return of the Fed’s policy to neutral and expect Fed Chairman Jerome Powell to advance the case for a 50 basis point cut tomorrow. However, the question is whether the rest of the FOMC members are the same of course. An economy growing at 2.5-3%, with low unemployment, above-target inflation and stocks at historic highs suggests there will be large pockets of resistance, making tomorrow’s outcome a coin toss.”
Macquarie: “Calls for a -50 bp reduction they are based on data – that is, on worsening US labor market activity. This is seen most strikingly by the lack of hiring, which makes labor market indicators look like the US economy is sliding into recession. Indeed, if the trend of these indicators continues, the economy will be led into recession. Monetary easing may restore this, but FOMCers may conclude that a -50 bp increase. is an exaggerated way to signal the start of an easing cycle in which index levels are not yet in a recessionary range, even if the trend is unfavorable.”
Bank of America: “A reduction of 25 bp. it would send the message to the markets that the Fed is in control of its own message. Chairman Powell could give a soft message emphasizing reliance on the data and leave the door open for larger cuts starting as early as November if the data warrants it. We believe this option would make the Fed’s life easier in the long run, even if it leads to significant fiscal tightening in the short term. No pain, no gain.”
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Reference;
Karaahmetovic, V. (2024) Fed decision day: Here’s what to expect from the most important rate call in years By Investing.com, Investing.com. Investing.com. Available at: https://www.investing.com/news/stock-market-news/fed-decision-day-heres-what-to-expect-from-the-most-important-rate-call-in-years-3620917 (Accessed: 18 September 2024).
