The Wall Street Journal's chief economics reporter, Nick Timiraos, predicts the Federal Reserve's potential interest rate cut and its likely impact on the U.S. economy.
of Federal Reserve System The central bank announced a much-needed interest rate cut on Wednesday, slashing borrowing costs following progress in battling inflation, slashing its policy rate by 50 basis points from its highest level in 23 years.
The Fed's first rate cut since March 2020 will bring the benchmark federal funds rate to a range of 4.75% to 5%.
Interest rates have been hovering in a range of 5.25% to 5.50% since July 2023, the highest since 2001, as the central bank looks for signs that stubborn inflation is heading toward its 2% target.
While recent months have shown signs of progress in moving inflation toward the Fed's target, the latest data suggests we're not there yet. Inflation slowed to 2.5% year-over-year in August, down from 2.9% the previous month and well below this inflation cycle's peak of 9.1% in June 2022.
U.S. economist warns Fed to be 'careful' about rising prices ahead of expected interest rate decision
Fed Chairman Jerome Powell announced that the central bank will cut interest rates for the first time in four years. (Photo: ROBERTO SCHMIDT/AFP via Getty Images/Getty Images)
Federal Reserve Chairman Jerome Powell The central bank has previously signalled it won't wait until inflation hits 2% before cutting interest rates.
“If we wait until inflation gets down to 2 percent, we've probably waited too long, because the tightening, or the level of monetary tightening that we're currently undertaking, would probably still have the effect of pushing inflation below 2 percent,” Powell explained in July.
Inflation rises by less than expected 2.5% in August
a Slowing employment Growing concerns about the labor market and economy potentially tipping into a recession have led to speculation the Fed may opt to cut interest rates by 50 basis points.
The central bank typically chooses to make small cuts of around 25 basis points at the start of a rate-cutting cycle but has made larger cuts at times of heightened economic uncertainty.
Most recently, it opted to make large 50 basis point cuts in interest rates in March 2020 at the start of the COVID-19 pandemic, in September 2007 during the housing crisis, and in January 2001 when the dot-com bubble burst.
Fed's actions have a bigger impact on markets than its words in fighting inflation, study finds
The Fed has previously signaled that policymakers will not wait until inflation hits 2% before lowering interest rates. (Photographer: Ting Sheng/Bloomberg via Getty Images/Getty Images)
The market had fully priced in a 25 basis point cut ahead of the Fed's decision on Wednesday, but traders were increasingly betting the Fed would cut rates by 50 basis points ahead of the announcement.
According to the CME FedWatch tool, the likelihood of a 50 basis point cut rose to 64% the day before the Fed's decision from 25% a month ago.
Wednesday's rate cut is expected to be the first in a series of interest rate cuts. Prior to the Fed's announcement, the market had been expecting the central bank to announce further rate cuts at its meetings in the coming months. The CME FedWatch tool gives a slightly more than 50% chance of a rate cut to the 4.5% to 4.75% range in November.
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“The market got what it wanted: the first big Fed rate cut,” said Chris Larkin, managing director of E*TRADE trading and investing at Morgan Stanley. “More than a question of whether the economy is doing well or not, a lot will depend on whether the Fed gives guidance on how quickly and how much they're going to cut rates going forward.”
The Federal Reserve's next policy meeting will be held on Nov. 6-7, just after Election Day on Nov. 5, and its final meeting of the year will be held on Dec. 17-18.
