“The highly anticipated Fed rate cut is finally happening,” said Nancy Vanden Houten, an economist at Oxford Economics.
The Federal Reserve has made no secret of its intentions, with Chairman Jerome Powell announcing in late August that “the time has come.”
This will be the first rate cut since 2020 and the severe repercussions of the pandemic crisis. Covid on US economywhat forced Federal Reserve To cut interest rates to zero to support economic activity.
But two years later, in the face of the sharp rise in the inflation rate, he was forced to gradually raise it again to contain excessive economic activity, which made these rates range between 5.25 and 5.50 percent since July 2023, their highest levels in two decades.
However, this high level leads to an increase in the cost of borrowing, and if maintained for a long period, it may cause an increase in unemployment, leading to an economic recession.
“It’s no longer a question of whether they’re going to cut rates, it’s a question of how much they’re going to cut,” Alicia Modestino, an economics professor at Northwestern University in Boston, told AFP.
Quarter point or half point?
Will Fed officials make a modest quarter-point cut, or go straight for a half-point cut?
Market participants’ expectations are converging, but slightly off by a quarter of a percentage point, according to CMA Group.
“The labor market is cooling but not collapsing, the consumer is holding up and inflation is slowing, but it’s probably too early to declare mission accomplished,” Nancy Vanden Houten said.
She noted that “the Federal Reserve has become more interested in the labor market, but Inflation “It remains high,” she said, noting that recent data “was somewhat disappointing, and shows that inflation still needs time to decline to the 2 percent target, which is considered favorable for the economy.”
As for inflation, which has been negatively affecting the purchasing power of American families since 2021, it is gradually declining.
The PCE index remained stable in July at 2.5 percent on an annualized basis, while the core PCE index (excluding energy and food) rose on a monthly basis.
The White House confirmed on Wednesday that the country is turning the “page on inflation.”
Alicia Modestino also expects only a “slight decrease”, because “on the other side of the spectrum of course, there is unemployment” with “a trend towards slowdown”.
But she added, “We have not yet reached the danger zone,” and therefore “there is nothing that justifies a major change in interest rates now.”
“A bigger cut would be an implicit admission that the Fed made a mistake by not easing policy in July,” said Gregory Daco, chief economist at Ernst & Young, who also forecast a quarter-point increase.
After this trend was inaugurated in June, European Central Bank On Thursday, the Fed cut interest rates again by a quarter of a percentage point.
Federal Reserve officials will announce at their meetings on Tuesday and Wednesday how far they can cut interest rates, and they will update their forecasts for inflation, gross domestic product and unemployment.
This will be the last meeting of the US central bank before the presidential election on November 5, in which the Democratic vice president faces Kamala Harris With former Republican President Donald Trump.
