Gregory Daco, chief economist at EY-Parthenon, explained why the Fed will gradually lower interest rates and not be too aggressive in “making money.”
of Federal Reserve System Tuesday kicks off a highly anticipated two-day meeting in which policymakers are expected to cut interest rates for the first time in four years as persistent inflation shows signs of continuing to ease.
The Federal Reserve's policy-making body, the Federal Open Market Committee (FOMC), meets on Tuesday and will announce its decision on interest rates on Wednesday. Federal Reserve Chairman Jerome Powell The central bank's thinking is also due to be revealed at the press conference.
Following its last policy meeting in July, the Fed left its benchmark federal funds rate unchanged at a 23-year high of 5.25% to 5.5%, but left open the possibility of cutting rates if inflation continues to ease. Inflation data showed that price growth slowed to 2.9% year-on-year in July, and August data released last week reflected a continuation of that trend, with headline inflation at 2.5% year-on-year.
Powell suggested the Fed doesn't need to wait for inflation to reach the central bank's 2% target, given the ongoing slowdown in inflation, which peaked at 9.1% in June 2022. Markets expect the Fed to begin a series of rate cuts this week that will continue over the coming months, although there is debate over the size of the first cut.
Inflation rises by less than expected 2.5% in August
Federal Reserve Chairman Jerome Powell said last month that the time has come to lower interest rates. (Al Drago/Bloomberg via Getty Images)
Economists surveyed by LSEG expect the Fed to cut interest rates by 25 basis points this week, Benchmark Rate It ranges from 5% to 5.25%.
The 25 basis point cut would be in line with the Fed's historical preference for smaller rate cuts at the beginning of a rate-cutting cycle, as smaller cuts give policymakers more opportunity to analyze the impact on the economy before their next meeting.
It was in March 2020 that the Federal Reserve cut interest rates by 50 basis points to begin a rate-cutting cycle. COVID pandemic Prior to that, the Fed opted to cut rates by 50 basis points at the start of rate-cutting cycles in September 2007 during the housing crisis and in January 2001 when the dot-com bubble burst.
Consumers expect inflation to ease, worried about job market and personal debt: NY Fed survey
However, interest rate markets are expecting a bigger Fed cut this week: Interest rate traders see a 65% chance of a 50 basis point cut this week, and a 35% chance of a 25 basis point cut, according to the CME FedWatch tool.
Ministry of Labor August employment report Payrolls rose less than expected this month, rising by 142,000 compared with the 160,000 that LSEG economists had expected. An increasingly weak labor market may be fuelling market expectations of a bigger interest rate cut from the Fed.
What does the Federal Reserve's interest rate cut mean for your wallet?
The market is fully pricing in a 25 basis point cut, with some traders expecting a 50 basis point cut. (Ting Sheng/Bloomberg via Getty Images)
“The Federal Open Market Committee is scheduled to start cutting interest rates when it meets this month, and the key takeaway is that this rate cut is just the beginning,” Greg McBride, chief financial analyst at Bankrate, said in a statement.
“A single rate cut is not a panacea for borrowers struggling with high lending costs and would have minimal impact on household finances overall. It is the cumulative effect of a series of rate cuts over a longer period that is more important,” McBride added.
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