The US Federal Reserve is set to make one of its most consequential decisions in decades. The question on every investor’s mind this week is by how much The Fed will cut rates.
Federal Reserve’s Upcoming Rate Cut
On Tuesday and Wednesday this week, the Open Market Committee will hold a series of meetings to determine if it should steer the US economy towards a soft landing, or condemn it to a recession. Since the 90s, the Federal Reserve has only executed one soft landing.
As such, it is had to be confident about the possibility of a soft landing. However, recent economic data that shows inflation is falling, and the job market is relatively healthy, raises the possibility of such an outcome.
Expected Rate Decision
If the Fed acts like most central banks and opts for a cautious approach, markets can expect a 25-basis point cut on Wednesday. The decision could be driven by a desire to avoid a new wave of inflationary pressure on the economy.
A 50-basis point cut is more unlikely. However, economists believe it may be necessary to cut the risk of a recession. On the other hand, it could signal that The Fed is worried about the outlook of the economy, which could send markets into a panic.
Central Banks Worldwide Closely Watching The Federal Reserve
The Federal Reserve’s decision is highly anticipated by central bank in Japan, China, the UK, which are set to meet this week. The European Central Bank already made cuts to its rate last week. It lowered its rate by 25 basis points to 3.50%, following another cut in June 2024.
Why The Upcoming Meeting Matters
The US Federal Reserve first began raising rates in March 2022, a decision that was inevitable. It raised the rate from zero to the current level of 5.5%, which is the highest since 2001. At the time, the Fed and most analysts believed it was a temporary rate hike, as the economy transitioned from the pandemic era as inflation rose to over 9% at one point.
While headline inflation is dropping steadily, reaching 2.5% in August, the core inflation rose slightly in August, while services inflation remains sticky. With mixed signals from the jobs market and inflation data, the decision to ease the rate is more complex.
Another factor to consider is the upcoming US election. Both candidates’ policies are likely to drive up inflation, which could send the Fed into an early reversal.
Will The Fed Cut Rates?
Traders are focused on the Fed’s upcoming decision, which could set the tone for the stock market for the remainder of 2024. Earlier, the Federal Reserve had indicated there could be as many as three rate cuts this year. However, following recent economic data, many are expecting an update to just two cuts.
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