Federal Reserve Prepares for First Rate Cut Since 2020

The Federal Reserve is poised to make a significant announcement that could mark its first interest rate cut in over four years. As economic conditions fluctuate and the US presidential election approaches, the decision on the size and timing of the cut is highly anticipated. This move by the Fed is expected just weeks before former Republican president Donald Trump faces off against the current Democratic vice president, Kamala Harris.

Fed chair Jerome Powell, along with other senior officials, have signaled an impending rate cut amid easing inflation and cooling labor market conditions. The Fed’s commitment to making decisions based on economic data remains steadfast, adhering to its dual mandate from Congress to ensure stable prices and maximum sustainable employment.

The upcoming decision places Powell in a delicate position, with the policy change occurring so close to the election. As Alicia Modestino, an associate professor of economics at Northeastern University, pointed out, “As much as I think the Fed tries to say that they’re not a political animal, we are in a really wild cycle right now.”

How Big a Cut?

The upcoming discussions among policymakers are expected to focus on whether to implement a modest cut of 25 basis points or opt for a more substantial reduction of 50 basis points. This would be the first rate cut since March 2020, when the Fed decreased rates to near-zero in response to the Covid-19 pandemic.

The Fed commenced raising rates in 2022 due to rising inflation, driven by supply chain issues post-pandemic and the Ukraine war. However, as inflation declines and the labor market cools while the economy continues to grow, the conditions appear favorable for a rate cut.

The decision between a 25 basis point cut and a more aggressive 50 basis point cut hinges on balancing the benefits to the labor market against potential risks of inflation resurgence. Modestino noted, “I think that in advance of the November meeting, there’s not quite enough data to say we’re in jeopardy on the employment side.”

Bank of America economists and other analysts predict the Fed will opt for a 25 basis point cut, which aligns with the central bank’s preference for predictability and stability, as emphasized by Modestino from Northeastern: “It’s good for markets, good for consumers, good for workers.”

How Many Cuts?

While a September rate cut seems likely, the trajectory for future cuts remains unclear. The Fed will provide insights into its plans when it releases updated economic forecasts from its 19-member rate-setting committee.

In June, forecasts showed only one expected cut for the year, down from three, due to a slight increase in inflation. However, the continued decrease in inflation and weakening labor market have increased expectations for further cuts.

Goldman Sachs Chief Economist Jan Hatzius predicts, “We continue to expect three rate cuts of 25bp each at the remaining 2024 FOMC meetings.” Traders also predict at least four more cuts in 2025, potentially lowering the Fed’s key lending rate to between 3.5 and 3.75 percent, which would mark a significant reduction from current levels.

As the Fed navigates these economic waters, market participants keenly watch for how these decisions will ripple through the economy and impact both the immediate financial landscape and longer-term economic growth.