The Federal Reserve is poised to announce its first rate cut in more than four years on Wednesday, with policymakers expected to debate how big a move to make less than two months before the US presidential election.
Senior U.S. central bank officials, including Fed Chairman Jerome Powell, have signaled in recent weeks that a rate cut is coming this month as inflation slips toward the bank’s long-term target of 2 percent and the labor market continues to cool.
The Fed, which has a dual mandate from Congress to act independently to ensure stable prices and maximum sustainable employment, has repeatedly stressed that it will make its decision on rate cuts based solely on economic data.
But a cut on Wednesday could cause more headaches for Powell, coming just before the election in which former Republican President Donald Trump is running against incumbent Democratic vice president Kamala Harris.
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“As much as I think the Fed is trying to say it’s not a political animal, we’re in a really vicious cycle right now,” Alicia Modestino, associate professor of economics at Northeastern University, told AFP.
How big a cut?
The debate among policymakers on Tuesday and Wednesday this week will likely focus on whether to move by 25 or 50 basis points.
However, a rate cut of any size would be the Fed’s first since March 2020, when it cut interest rates to near zero to support the US economy through the Covid-19 pandemic.
The Fed began raising interest rates in 2022 in response to rising inflation, fueled largely by the post-pandemic supply crisis and the war in Ukraine.
It has kept its key lending rate at a two-decade high between 5.25 and 5.50 percent for the past 14 months, pending an improvement in economic conditions.
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Now, with inflation falling, the labor market cooling and the U.S. economy continuing to grow, policymakers have decided conditions are ripe for a cut.
Policymakers have a choice: take a small 25 basis point cut to ease things, or a more aggressive 50 basis point cut, which would be helpful for the labor market but could also risk rekindling inflation.
“I think before the November meeting, there’s not enough evidence to say we’re at risk on the employment side,” said Modestino, who was previously a senior economist at the Federal Reserve Bank of Boston.
Analysts see the smaller cut as a safe bet.
“We expect the Fed to cut by 25 basis points,” Bank of America economists wrote in a recent note to clients.
“The Fed likes predictability,” Northeastern’s Modestino said. “It’s good for markets, good for consumers, good for workers.”
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“So a 25 basis point cut now, followed by another 25 basis point cut in November after the next round of economic data, offers a somewhat smoother path for the economy,” he added.
How many cuts?
While analysts overwhelmingly expect the Fed to begin tapering in September, there is less clarity on what will come next.
The Fed will shed some light on the matter on Wednesday when it releases its 19-member rate-setting committee’s updated economic forecasts — including their expectations for a rate cut.
In June, FOMC members sharply reduced the number of cuts they had made for this year from an average of three to just one amid a slight uptick in inflation.
But as inflation has eased and the labor market has weakened, expectations for more cuts have grown.
“We continue to expect three rate cuts of 25 basis points each in the remaining FOMC meetings in 2024,” Goldman Sachs chief economist Jan Hatzius wrote in a note to clients published on Thursday.
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Traders also see a more than 99 percent chance of at least four more cuts in 2025, which would bring the Fed’s key lending rate down to between 3.5 percent and 3.75 percent — 175 basis points below current levels.
Source: AFP