The Federal Reserve is preparing to lower interest rates for the first time in over four years, with a decision expected soon. This move comes just weeks before the U.S. presidential election and reflects efforts to control inflation and support the slowing job market.
Economic Indicators Prompting the Rate Cut
Recent reports, including the Consumer Price Index (CPI) announcement on September 11, 2024, show that inflation is easing toward the Fed’s long-term target of 2%.
The cooling labour market and this slowdown in inflation have strengthened the case for a rate cut.
Senior Fed officials, including Chairman Jerome Powell, have indicated that conditions are now right for such a move.
Fed Rate Cut Options: A Strategic Dilemma
The big question for policymakers is whether to reduce rates by 0.25% (25 basis points) or take a more aggressive approach with a 0.50% (50 basis points) cut.
A rate cut of any size would be the first since March 2020, when the Fed slashed rates to near-zero during the COVID-19 pandemic to boost the economy.
Historical Context and Current Economic Policies
Since 2022, the Fed has been raising rates to control the inflation surge caused by post-pandemic supply issues and the war in Ukraine.
For the past 14 months, rates have remained at a 20-year high of 5.25% to 5.50%. Now, with the CPI data showing inflation trending downward and the economy still growing, experts predict the Fed will opt for a smaller, cautious 25 basis points cut.
Prospective Economic Impact of the Rate Cut
Economists believe a 25 basis points cut is a safe bet, as it offers a measured approach to stimulate the economy without risking a spike in inflation. Some predict that another similar cut will follow in November, based on further economic data.
Major banks, like Goldman Sachs, expect a total of 75 basis points in cuts by the end of 2024, while Citi forecasts a more aggressive 125 basis points. By 2025, traders see the Fed’s key lending rate dropping to between 3.5% and 3.75%, which would be 175 basis points lower than current levels.
Stay tuned to the next episode of the Weekly Market Spotlight!
