Analysts and traders are divided over whether the central bank will opt for a modest 25 basis point cut or a more aggressive half-point reduction
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The US Federal Reserve is widely expected to announce its first interest rate cut since 2020 on Wednesday (September 18), marking a significant shift in monetary policy as inflation cools and the labor market shows signs of softening. The decision comes as inflation trends closer to the central bank’s long-term target of 2 per cent, down from the four-decade highs reached last year.
Fed Chair Jerome Powell and other senior officials have hinted in recent weeks that a rate cut was imminent, signaling their intent to provide further support to the US economy as growth slows. However, uncertainty remains over the size of the rate reduction. The Fed’s benchmark interest rate currently stands at a 23-year high, in a range of 5.25 per cent to 5.5 per cent.
Analysts and traders are divided over whether the central bank will opt for a modest 25 basis point cut or a more aggressive half-point reduction. A quarter-point cut would be viewed as a cautious step, aligning with the Fed’s recent messaging about controlling inflation while maintaining economic stability. On the other hand, a larger half-point cut could stimulate demand but risks reigniting inflationary pressures.
Futures markets reflected this uncertainty, with data from CME Group showing a 63 per cent probability of a half-point cut and a 37 per cent chance of a smaller 25 basis point move. Both options have implications for consumers and businesses, as a cut would lower borrowing costs on everything from mortgages to credit cards, potentially boosting economic activity.
“Around points of inflection, we get the most mixed signals,” said Erica Groshen, senior economics advisor at Cornell University, in an interview with AFP. “The Fed is trying to make sense of these signals, and so are the markets.”
While many experts agree that inflation has eased enough to justify a cut, there is less consensus on how many cuts the Fed will implement this year. In June, members of the Fed’s rate-setting committee scaled back their projections for rate cuts, reducing the expected number of cuts from three to just one. However, as inflation has declined and the labour market has cooled further, analysts at major US banks are increasingly anticipating more than one rate reduction before the year ends.
The Fed’s decision also carries significant political implications. With the 2024 US presidential election looming, a rate cut could be used by the Biden administration as evidence that its economic policies are effectively combating inflation. Consumer concerns about the cost of living remain high, and the administration will likely tout any rate cuts as a sign that inflation is under control, boosting their standing with voters.
Regardless of the size of the cut, Wednesday’s decision will set the tone for the remainder of the year.