Will the First Rate Cut be the Deepest?
Introduction:
The Federal Reserve is expected to announce its first interest rate cut since the start of the COVID-19 pandemic. This move comes as a result of easing inflation rates and a cooling labor market. The upcoming policy meeting on September 17 is highly anticipated and could mark the beginning of the end of an era of high interest rates.
The Size of the Rate Cut:
There are two main debates surrounding the rate cut. The first is whether it will be a quarter-point or half-point reduction. The second is whether the central bank will be aggressive or conservative in its approach.
The Need for a Half-Point Reduction:
Investors believe that the Fed should have cut rates earlier and may have fallen behind the curve. As a result, there is a growing belief that a half-point reduction is necessary to make up for the delay. Ipek Ozkardeskaya, a senior analyst at Swissquote Bank, explains that the Fed needs to execute a larger cut to catch up.
Tepid Forecasts:
However, some economists have more tepid forecasts for the rate cut. Goldman Sachs Chief Economist Jan Hatzius predicts a quarter-point cut, while ING economists believe a 25-basis-point cut is more likely. Robert Johnson, an economist at Creighton University, expects a 25-basis-point reduction but wouldn’t be surprised by a 50-basis-point cut. These economists suggest that the Fed has exercised caution in its rate adjustments in recent years and may continue to do so.
The Need for Aggressive Easing:
While the economy is not facing substantial deterioration, there are signs of weakening. Jan Szilagyi, founder of Toggle AI, points out that leading macro indicators suggest a more aggressive easing will be necessary. This sentiment is echoed by market observers who believe that the Fed could lower rates by as much as 250 basis points in 2025.
Fed’s Cautionary Approach:
Fed Governor Christopher Waller supports starting the rate-cutting process but wants to begin slowly. He stands ready to act promptly if there is a significant deterioration in the labor market. Brian Coulton, chief economist at Fitch Ratings, notes that the Fed’s easing cycle will be mild and slow to fight inflation.
Expectations for the Future:
Investors anticipate between 75 and 100 basis points’ worth of cuts in the final quarter of 2024. S&P Global Ratings’ chief U.S. economist expects one 25-basis-point rate cut at every meeting for the rest of the year. RBC economists predict a median 75 basis points worth of cuts this year. Looking ahead to 2025, the Fed could lower rates by as much as 250 basis points.
The Risk of Inflation:
There is a concern that higher tariffs could make inflation stickier, which may cause the Fed to hit the pause button after a few cuts. Atlanta Fed President Raphael Bostic warns against loosening policy prematurely, as it can rekindle inflation and entrench it in the economy for months or years.
Conclusion:
The upcoming rate cut announcement holds significant weight for the economy. While investors and analysts may have differing expectations, it is clear that the Fed is likely to take a cautious and measured approach. The size and aggressiveness of the rate cut will depend on various factors, including economic conditions and inflation levels.
