Washington (AFP) – The US Federal Reserve is all but certain to cut interest rates on Wednesday for the first time in more than four years, but the size of the reduction is unusually hard to predict. The decision will affect rates at which US commercial banks lend to consumers and businesses, impacting the cost of borrowing on everything from mortgages to credit cards less than two months before the presidential election.
The second day of deliberations got underway at 9:00 am in Washington (1300 GMT), the Fed said in a statement. Its rate decision will be announced later Wednesday, and will be followed by a press conference with Fed Chair Jerome Powell. Senior officials at the US central bank, including Powell, have indicated that a rate cut is coming, as inflation eases toward the bank’s long-term target of two percent, and the labor market continues to cool in the post-Covid economy.
Traders and analysts remain uncertain about how sharply the Fed will lower its benchmark lending rate from the current 23-year high of between 5.25 and 5.50 percent. Some are predicting a smaller cut of a quarter of a percentage point, while others believe a bigger half-point reduction is in the works. A smaller cut would be a more predictable move, while a bigger cut would do more to boost demand — while also running the risk of reigniting inflation.
“It’s around points of inflection that we get the most mixed signals,” Erica Groshen, a senior economics advisor at the Cornell University School of Industrial and Labor Relations, told AFP. “The Fed is trying to make sense out of them. And the markets are trying to make sense out of them, and trying to make sense out of how the Fed will interpret them,” added Groshen, a former vice president at the New York Fed.
Futures traders see a 61 percent chance that the Fed will announce a bigger, half percentage-point move on Wednesday, and a 39 percent chance it will go with a more conventional 25 basis point cut, according to CME Group data. When the Fed cuts interest rates, commercial banks in the United States generally follow, reducing borrowing costs and stimulating demand in the world’s largest economy.
For the Fed, a rate cut of any size would signal that consumer inflation, which hit a four-decade high in 2022, was returning to target. While there is a “compelling risk management case to support a larger move,” recent Fed communications and data did not “argue clearly” for a larger cut, economists at Deutsche Bank wrote in a recent investor note, predicting a 25 basis point cut. “We remain of the view that the Fed will opt for a 25bps (basis point) rate cut to start its easing cycle,” EY chief economist Gregory Daco wrote in a note to clients.
While analysts overwhelmingly expect the Fed to announce it is cutting rates on Wednesday, there is less clarity about what comes next. In June, rate-setting committee members sharply reduced the number of cuts they had penciled in for this year from a median of three down to just one, amid a small uptick in inflation. But as inflation has fallen in the months since, and the labor market has cooled, analysts at top US banks have raised the number of cuts they expect the Fed to pencil in this year.
The Fed has a dual mandate from Congress to act independently to set monetary policy to ensure both stable prices and maximum sustainable employment. If a cut is announced on Wednesday, it will likely lift the spirits of US consumers, who have consistently named the cost of living and inflation as top concerns ahead of November’s election in which former Republican president Donald Trump is running against Democratic Vice President Kamala Harris.
Trump has repeatedly criticized Fed Chair Powell, who he first appointed to run the US central bank, and has suggested that its decisions are political — accusations the US central bank has strongly refuted. “The economy is now not good at interest rates,” Trump said at an event in Michigan on Tuesday evening. “You’ll see they’ll do the rate cut and all the political stuff tomorrow.”
© 2024 AFP
