When the Federal Reserve concludes its policy meeting on Wednesday, officials are expected to signal the end of an era with the first interest rate cut in four years and chart a course for lower interest rates over the next two years.
“This is a big meeting,” said former Kansas City Fed President Esther George. “This has been predicted since late last year. It has been expected for a long time.”
The central bank is expected to cut interest rates by a quarter of a percentage point from a 23-year high of 5.25% to 5.5% in a new range of 5.0% to 5.25%, but many on Wall Street are predicting an even bigger cut. I’m betting. The move would officially mark the end of the most aggressive anti-inflation campaign since the 1980s.
Investor expectations have fluctuated widely about how much the Fed will cut interest rates for the first time. As of early Wednesday, traders were pricing in a roughly 60% chance of a 50 basis point (bp) cut, and a 40% chance of a 25 basis point (bp) cut. As of Friday, the odds were evenly split, but just over a week ago, 85% supported a small rate cut.
Read more: What the Fed’s interest rate decisions mean for bank accounts, CDs, loans, and credit cards
The Fed plans to cut interest rates about six weeks before the presidential election, but presidential candidate and former president Donald Trump and other Republicans have argued that the central bank should hold off on cutting rates until after the election. are.
The move is the first in a series of rate cuts as the central bank’s new era of monetary easing is expected to last until 2025-2026. This change will ripple throughout the U.S. economy by allowing Americans to rent what they need more cheaply. Purchase a house or car, purchase with a credit card, etc.
Companies will also find it easier to obtain loans to finance their operations.
In addition, Fed officials are expected to release a new rate forecast known as a “dot plot,” which indicates how much the Fed will cut rates for the rest of this year and into next year.
Finally cut? Federal Reserve Chairman Jerome Powell spoke in Washington, D.C., last month. (Nathan Howard/Getty Images) · Nathan Howard via Getty Images
Luke Tilley, veteran chief economist at Wilmington Trust, expects the Fed to cut interest rates by 25 basis points in September. He also expects policymakers to cut rates by another 25 basis points this year, followed by six of the central bank’s eight policy meetings, laying out a path to cuts in 2025. . He added that if the Fed could cut interest rates by 50 basis points at an upcoming meeting without spooking markets, it would do so.
Tilley believes the Fed is behind the curve when it comes to rate cuts, because “If they had just started cutting rates in July and had done it at a more gradual pace, we wouldn’t be talking about 50 rates right now.” That’s because it would be free. Still, Tilley said it doesn’t matter whether interest rates fall by 75 basis points or 100 basis points for the entire year.
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Noting that markets are pricing in future Fed actions, Tilley said, “What matters is the trajectory, how they talk about it, how they frame it. Because words matter.”
As for Mr. George, he expects rates to be cut by at least 25 basis points in the remaining meetings this year. (There are 3 times including Wednesday.)
The former Kansas City Fed president estimates the Fed will cut interest rates by 1.25 to 1.5 percentage points before pausing to consider how interest rates compare to economic conditions. But George points out that “this is a committee that has to revolve the story around the idea of a 50 basis point rate cut.”
Meanwhile, Fed Chairman Chris Waller said he was open to the size and pace of rate cuts based on economic data and would support it if the data suggested a larger rate cut was needed. Ta. Waller said he strongly supports raising interest rates ahead of time if inflation picks up in 2022, and would also support lowering rates ahead of time if appropriate.
Big meeting: In 2018, Federal Reserve Chairman Jerome Powell met with New York Fed President John Williams and then-Kansas City Fed President Esther George. (Reuters/Ann Safir) · Reuters/Reuters
Officials are considering cutting interest rates on confidence that inflation is likely to return to the 2% target. The latest reading on inflation, as measured by the Consumer Price Index, showed that inflation continues to decline modestly, marking the fifth consecutive positive inflation report.
Officials said they needed more than a quarter of good inflation data to be confident that inflation was really coming down, following concerns that inflation had stalled in the first quarter. Core CPI inflation rose 3.2% year-on-year in August and July, 3.3% in June, 3.4% in May, and 3.6% in April.
Read more: Mobile phones, furniture and used cars: Prices are easing here as inflation cooldown continues
Inflation expectations have also declined. The difference in yields between 10-year inflation-linked government bonds and standard government bonds with the same maturity, a measure of inflation expectations, is at its lowest level since early 2021. Inflation expectations for the next two years are based on the CPI inflation rate as of December 2020. That’s just 1.5%, below the Fed’s 2% target.
At the same time, the job market has cooled as employment slowed over the summer, with 118,000 jobs created in June, 89,000 in July, and 142,000 in August. is also lower than the average monthly increase of 202,000 people over the past 12 months.
The economic downturn has prompted Fed officials to turn their attention from inflation to the labor market.
In a speech in Jackson Hole, Wyoming, in late August, Fed Chairman Jay Powell said the Fed is “committed to supporting a strong labor market as we move further toward price stability.” He said the Fed is not “seeking or welcoming further cooling of labor market conditions” and that the current level of policy rates gives the Fed “ample room to cut rates in response to a weakening job market.” He pointed out that he was giving.
Fed watchers expect Powell to repeat many of those messages delivered in Jackson Hole in his comments Wednesday.
No recession, but danger lurks: Wilmington Trust’s Luke Tilley. (Tim Leedy/MediaNews Group/Reading Eagle via Getty Images) · MediaNews Group/Reading Eagle via Getty Images via Getty Images
Fed officials are also expected to release their outlook for unemployment, inflation and the economic outlook after the meeting. Powell will hold a press conference at 2:30 p.m. ET.
George said he believes there are several scenarios in play, including the possibility that Powell could be preparing for a significant rate cut. “He could tell stories even when he was about 50 years old,” George said. “He may come to this meeting and say, ‘We’re going to be more proactive in making sure we do our part in terms of the labor market.’
But “I think Mr. Powell is right in the middle,” said Wilmer Stith, a bond fund manager at Wilmington Trust. Stith added that while the Fed is very mindful of the pain associated with rising unemployment, it is also mindful of the average American’s cost of living.
EY chief economist Gregory Daco on Wednesday agreed that “incrementalism” will prevail, but said the bank could mention a larger rate cut at a future meeting.
Are there still concerns about a serious economic slowdown? The employment statistics in July had raised concerns that the economy had entered a recession, but the recovery in the employment statistics in August has led to concerns that the economy may have entered a recession. My concerns have eased.
Wilmington Trust’s Tilley expects the job market to continue to expand.
“I don’t think the labor market is going to go into recession. That being said, that’s my biggest concern,” he said.
Tilley still believes a soft landing is underway, but said: “The economy is slowing and is vulnerable to shocks.”
And it doesn’t necessarily require a big mess. Tilly’s examples include a major oil shock that could hurt consumer spending or a stock market crash that could set back corporate hiring. He also said some of the policies of presidential candidates Donald Trump and Kamala Harris, such as across-the-board tariffs and tax increases, could hurt consumers next year.
Learn more about the long-awaited Fed rate cut below.
Jennifer Schoenberger is a veteran financial journalist covering markets, economics, and investing. Yahoo Finance covers the Federal Reserve, cryptocurrencies, and the intersection of business and politics. X Follow her at @Jenniferisms.
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