US Fed prepares for first interest rate cut in more than four years ahead of 2024 presidential election

THE United States Federal Reserve The Fed is expected to announce its first interest rate cut in more than four years this week since 2020, months before the US presidential election scheduled for November 2024, AFP reported.

He added that Fed policymakers will debate the extent of the cut will be ahead of the expected announcement on September 18 (US local time) this week.

Senior Fed officials, including the chairman Jerome Powellhave indicated that a rate cut is imminent, as inflation In the United States, growth is approaching the central bank’s 2% target, while the labor market continues to cool, the report added.

“The rate cut depends solely on economic data”

The US Congress calls on the central bank to ensure stable prices and sustainable employment through independent action, and Federate The Fed has often stressed that its rate cut decision would be based “solely on economic data,” according to AFP.

A cut this week would still be a “headache” for Powell, as it comes just two months before the election conflict between Kamala Harris (Democratic candidate and Vice President of the United States) and Donald Trump (Republican candidate and former President of the United States).

“Even though I think the Fed tries to say they’re not a political animal, we’re in a really wild cycle right now,” Alicia Modestino, an associate professor of economics at Northeastern University and a former senior economist at the Federal Reserve Bank of Boston, told AFP.

How big a problem can we expect?

On September 17 and 18, policy makers will meet debate on whether to move the rate cut by 25 basis points or 50 basis points (bps).

However, either figure would be significant since it is the Fed’s first rate cut since March 2020, when it slashed rates to near zero to support the U.S. economy during the crisis. Covid-19 pandemic.

The Fed began its rate hikes in 2022 in response to a surge in inflation, fueled largely by a post-pandemic supply crunch and the war in Ukraine; and has held its policy rate at a two-decade low of 5.25% to 5.50% for the past 14 months as it waits for economic conditions to improve.

Now, with inflation falling, the labor market As demand cools and the U.S. economy continues to grow, policymakers have decided that conditions are ripe for a taper.

Take it easy or be more aggressive

Policymakers face a choice: a small 25 basis point rate cut to ease the recovery or a more aggressive 50 basis point cut to help the labor market despite the risk of a resurgence in inflation.

“I think that before the November meeting, there is not enough data to say that we are in danger on the job “side,” Modestino said.

Analysts consider the more modest cut a safe bet. “We expect the Fed to cut rates by 25 basis points,” Bank of America economists wrote in a recent note to clients.

“The Fed likes predictability. It’s good for markets“It’s good for consumers, it’s good for workers. So a 25 basis point cut now, followed by another 25 basis point cut in November after the next round of economic data, provides a little bit of a smoother glide path for the economy,” Modestino added.

How many cuts are planned?

While analysts overwhelmingly expect the US Fed to begin cutting rates in September, there is less clarity on what will come next. Many are hoping the central bank will light their way in the update economic The publication is scheduled for September 18.

The forecasts will come from the Fed’s 19-member rate-setting committee and will include their expectations for rate cuts, the report added.

In June, FOMC Committee Council members have dramatically reduced the number of budget cuts they had planned for this year, from an average of three to just one, amid a slight increase in inflation. But with inflation falling and the labor market weakening, expectations of further budget cuts have risen.

“We continue to expect three rate cuts of 25 bps each at the remaining FOMC meetings in 2024,” Goldman Sachs chief economist Jan Hatzius wrote in a note to clients last week.

Traders also see a greater than 99% probability of at least four more rate cuts in 2025, which would bring the Fed’s benchmark rate to between 3.5% and 3.75%, or 175 bps below current levels.