The Federal Reserve cut interest rates for the first time in four years on Wednesday and is widely expected to set the course for future rate cuts.
Investors are more hopeful for a half-percentage-point cut than a quarter-percentage-point reduction. Traders have been increasing bets in recent days that the central bank will cut rates by 50 basis points. As of Wednesday morning, federal funds futures were pricing in a more than 60% chance that the Fed would cut rates by 50 basis points, up from just 15% a week ago.
“A 50 basis point Fed cut is realistic,” said Wilmer Stith, a bond trader at Wilmington Trust who said last week he thought a 25 basis point cut was likely. But he’s not ready to call on whether that will actually happen.
Read more: How the Federal Reserve’s interest rate decision will affect your bank accounts, CDs, loans and credit cards
Ahead of the blackout period that began on Sept. 7, comments from Fed officials suggest they are likely to cut interest rates by a quarter of a percentage point. That would mean a new 5.0-5.25% range at the end of their policy meeting this afternoon, down from a 23-year high of 5.25-5.5%.
In any event, the Fed’s action will officially mark the end of its most aggressive fight against inflation since the 1980s. The cut will be the first in a series of rate cuts, and much attention will be focused on the Fed’s new interest rate projections, or so-called dot plots, where officials predict how many rate cuts they will make for the rest of this year and next.
Fee dispute
JPMorgan Chief Economist Michael Feroli is among those who believe the Fed needs to cut rates more.
“The Fed’s role is clear: cut interest rates by 50 basis points in line with the changing balance of risks,” Feroli said.
As inflation continues its slow downward trend, officials are turning more attention to the weakening job market, with Fed Chairman Jay Powell vowing to do all he can to keep it strong.
Feroli expects a 50-basis-point cut on Wednesday and two 25-basis-point cuts at the final two meetings of the year.
But former Kansas City Fed President Esther George expects a quarter-point cut and said Powell could lay the groundwork for further cuts at a later meeting.
Who is right? Of course, we will see. But it may take some serious effort to build a unanimous consensus at the FOMC table to vote for a 50 basis point rate cut.
Some committee members, including Fed President Michelle Bowman, Atlanta Fed President Raphael Bostic and Philadelphia Fed President Patrick Harker, had suggested that starting at 25 basis points was reasonable and that they were not wary of a cooling labor market.
The story continues
By contrast, at Jackson Hole in late August, Chairman Powell struck a dovish tone, suggesting he might favor a 50 basis point rate cut and saying the Fed would “do all we can to support strong labor markets as we make further progress toward price stability.” He said the Fed “does not seek or welcome a further weakening in labor market conditions” and that current policy rates give the Fed “ample room” to lower rates in response to weakening labor markets.
In any event, Chairman Powell will be required to explain the rate decision and outlook in a post-meeting press conference, where he could say he expects a bigger, more aggressive cut or say the Fed is expected to take a cautious, gradual approach and is prepared to take more aggressive steps if necessary.
Many changes to the wording of the Federal Reserve’s policy statement are also expected to reflect the Fed’s decision to begin a rate-cutting cycle, including that officials are confident that inflation is declining sustainably toward their 2% target, that officials are now focused on labor market weakness, and that the timing and size of future rate cuts will be data dependent.
In addition to policy decisions and interest rate forecasts, Fed officials are scheduled to release forecasts for unemployment, inflation and the economic outlook. Fed Chairman Jerome Powell will hold a press conference at 2:30 p.m. ET.
Jennifer Schonberger is a veteran financial journalist specializing in markets, economics and investing. She covers the Federal Reserve, cryptocurrency and the intersection of business and politics for Yahoo Finance. X Follow her at @Jenniferisms.
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