Pivotal Week for Markets: What to Expect From Fed Decision

The central bank is anticipated to announce a rate cut, but the key question remains: Will the initial cut be the deepest?

Federal Reserve Chairman Jerome Powell is introduced at the Jacques Polak Research Conference at the International Monetary Fund in Washington on Nov. 9, 2023. Mark Schiefelbein/AP Photo

News Analysis

A recent blend of easing inflation rates and cooling labor market trends could force the Federal Reserve to pull the trigger on its first interest rate cut since the onset of the COVID-19 pandemic.

U.S. central bankers kicked off their widely anticipated two-day policy meeting on Sept. 17, which could officially be the beginning of the end of an era of high interest rates.

Last month, Fed Chair Jerome Powell told a Jackson Hole Economic Symposium audience of economists, monetary policymakers, and business leaders that “the time has come for policy to adjust.”

After the economy endured 14 months of the highest interest rates in two decades, the financial markets are overwhelmingly betting that the institution will begin to trim the benchmark federal funds rate and signal that more cuts are coming in the home stretch of 2024 and into 2025.

Heading into the Sept. 18 announcement, there are two main debates on Wall Street and in economic circles.

First, will the Fed kick off the fresh cycle with a quarter-point or half-point rate cut?

Second, will the central bank be aggressive or conservative in loosening monetary policy?

The Fed typically moves in quarter-point increments, affording policymakers the time to assess the situation and determine whether their policy adjustments are affecting economic conditions.

While there are concerns that conditions are softening, the economy is not facing substantially deteriorating developments.

In August, the annual inflation rate slowed to 2.5 percent, the lowest reading since February 2021.

The latest employment report showed that the U.S. labor market created a solid 142,000 new jobs and that the unemployment rate ticked lower to 4.2 percent.

Still, investors are signaling that the Fed will be bursting right out of the gate amid signs of weakening across the economic landscape.

According to the CME FedWatch Tool, the futures market is projecting a 59 percent probability of a 50-basis-point cut.

Wagers for a half-point reduction have been rising because “some investors think that the Fed should’ve cut rates already in July and that it may have fallen behind the curve by not doing so,” Ipek Ozkardeskaya, senior analyst at Swissquote Bank, said.

So to make up for the delay, the Fed needs to execute a half-point reduction, Ozkardeskaya said.

However, some economists have given a more tepid forecast for the outcome of this week’s Fed meeting.

Goldman Sachs Chief Economist Jan Hatzius said he thinks the Fed’s potential September rate cut “will be modest in size,” predicting a quarter-point cut.

ING economists said that a 25-basis-point cut is “more likely” given that “the most recent jobs report was not as weak as feared, and August core CPI came in hotter than hoped at 0.3 percent MoM.”

Federal Reserve Chair Jerome Powell's speech is broadcast on the floor of the New York Stock Exchange on Aug. 23, 2024. Angela Weiss/AFP via Getty Images

Robert Johnson, an economist and professor at Creighton University’s Heider College of Business, said he expects a 25-basis-point reduction “but wouldn’t be the least bit surprised with a 50-basis-point cut.”

“This Fed has exercised great caution over the last few years—both in raising and in cutting rates, and I believe that philosophy will continue,” Johnson told The Epoch Times.

According to Jan Szilagyi, founder of financial investment research services firm Toggle AI, the central bank has been “behind the curve” on policy this year.

“That’s not as tragic as it sounds because they’ll have a chance to catch up with a larger cut in September,” he said in an email to The Epoch Times.

“And the economy isn’t exactly falling off the cliff. But momentum and many leading macro indicators are starting to suggest that a more aggressive easing will be necessary.”

In a University of Notre Dame Sept. 6 speech, Fed Gov. Christopher Waller said that while he supports starting the rate-cutting process at the September meeting, he wants to begin this campaign slowly.

“While I expect that these cuts will be done carefully as the economy and employment continue to grow, in the context of stable inflation, I stand ready to act promptly to support the economy as needed,” he said.

“If subsequent data show a significant deterioration in the labor market, the [Federal Open Market Committee] can act quickly and forcefully to adjust monetary policy.”

Market observers have also assessed the Federal Reserve’s policy path in the coming year.

Rate Cuts and Beyond

In addition to the size of the September rate cut, updates will be made to the Summary of Economic Projections (SEP)—a list of quarterly economic projections made by Fed officials regarding the median policy rate, inflation, unemployment, and GDP.

The June SEP numbers had forecast just one 25-basis-point rate cut by the year’s end after a first quarter of hotter-than-expected inflation reports.

Now that inflation appears to be heading toward the central bank’s 2 percent target, investors anticipate between 75 and 100 basis points’ worth of cuts in the final quarter of 2024.

Satyam Panday, chief U.S. economist at S&P Global Ratings, said he expects one 25-basis-point rate cut at every meeting for the rest of the year, “consistent with their macro forecasts and reaction function.”

According to RBC economists, the SEP will reveal a median 75 basis points worth of cuts this year.

As for what lies ahead in 2025, investors believe that the Fed could lower rates by as much as 250 basis points over the next 12 months, based on CME FedWatch Tool data.

Economists and market analysts have expectations that differ from those of the broader financial markets.

“Interest rates took the elevator going up but they’ll be taking the stairs coming down,” Greg McBride, chief financial analyst at Bankrate, said.

Johnson noted that the Fed’s actions “will take place in a measured fashion” unless there is a dramatic turnaround in the wider economy.

Brian Coulton, chief economist at Fitch Ratings, said the Fed’s easing cycle “will be mild and slow by historical standards,” citing more work that the central bank needs to do to fight inflation.

“The long-awaited Fed easing cycle is upon us, but the FOMC will be cautious after the inflation challenges of the past few years,” Coulton said in an analytical note.

“The pace of rate cuts will be gentle, and monetary easing won’t do much to boost growth next year.”

Hatzius noted that there could be a risk that the Fed hits the pause button after the first few cuts “because inflation proves stickier, perhaps because of higher tariffs.”

Atlanta Fed President Raphael Bostic highlighted in a Sept. 4 essay the danger of loosening policy “prematurely,” noting that it “is a dangerous gambit that can rekindle inflation and entrench it in the economy for many months or even years.”

Investors and analysts may have to engage in a guessing game until an official announcement is released at 2 p.m. Eastern time on Sept. 18.

For now, according to the ING economists, it is “too close to call.”