With a Fed rate cut almost certain, debate is raging over the size of the reduction (Image: REUTERS/Joshua Roberts)
It is almost certain that the Federal Reserve (Fed) will cut its interest rate fees for the first time in more than four years on Wednesday as the US central bank USA (USA) begins to adjust the restrictive conditions it imposed to contain the inflationbut it remains to be seen whether authorities will opt for a 25 or 50 basis point cut.
How they choose to start the new monetary easing cycle — less than two months before the US presidential election — likely depends more on the signal they want to send than on expectations of near-term macroeconomic impact, even as concerns about the jobs market mount.
A 50-point cut — now more than 60% likely in futures markets — would signal a commitment to sustaining the current economic expansion and the job growth that accompanies it, something the chair do Fed, Jerome Powellsaid to be the top priority now that inflation is approaching the 2% target.
A 25-point reduction would be more consistent with how the Fed has initiated previous easing cycles outside of any emerging crisis. It would align with the cautious approach officials have said they are taking toward rate cuts and would follow economic data that has shown the economy is slowing but not seemingly on the verge of collapse.
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“We’ve never been close to a major inflection point in rates without more certainty” about how it would start, Diane Swonk, chief economist at KPMG, wrote on Monday ahead of the Fed’s two-day meeting. But while a 50 basis point cut “will undoubtedly be discussed,” Swonk said, “Powell is unlikely to have the votes.”
Others argued that after the Fed's last meeting in July, where several officials were open to cutting rates then and there, and with investors betting on a 50-point cut now, doing less would be seen as falling short of Powell's statement last month that he doesn't want the jobs market to weaken further.
“The Fed will deliver a 50 basis point cut to kickstart the easing cycle and will seek to … reassure that it is not behind the curve and build confidence” that the expansion will continue as inflation eases further, wrote Krishna Guha, vice president at Evercore ISI, noting that there could be as many as three dissenters, unusual amid Powell’s efforts to operate with consensus.
The Fed's decision will be announced at 3 p.m. ET and will be accompanied by updated economic projections that will show how much policymakers expect rates to fall over the course of this year and into 2025. Officials will also update their outlook for inflation, unemployment and economic growth.
The interest rate has been held in its current range of 5.25% to 5.50% for 14 months. While the rate decision itself is crucial, how Powell describes that choice and the outlook for borrowing costs during his post-meeting news conference could be even more important. He begins his remarks about a half-hour after the decision is released.