Mon, Sep 16, 2024 page12

• US Fed to announce cut on Wednesday

  GLOBAL ECONOMY: Policymakers have a choice of a small 25 basis-point cut or a bold cut of 50 basis points, which would help the labor market, but might reignite inflation

  • AFP, WASHINGTON
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  The US Federal Reserve is gearing up to announce its first interest rate cut in more than four years on Wednesday, with policymakers expected to debate how big a move to make less than two months before the US presidential election.

  Senior officials at the US central bank including Fed Chairman Jerome Powell have in recent weeks indicated that a rate cut is coming this month, as inflation eases toward the bank’s long-term target of two percent, and the labor market continues to cool.

  The Fed, which has a dual mandate from the US Congress to act independently to ensure stable prices and maximum sustainable employment, has repeatedly stressed it would make its decision on rate cuts based solely on the economic data.

  

  The US Federal Reserve building in Washington is pictured on April 3, 2012.

  Photo: Reuters

  The debate among policymakers tomorrow and on Wednesday would likely center on whether to move by 25 or 50 basis points. However, a rate cut of any size would be the Fed’s first since March 2020, when it slashed rates to near-zero to support the US economy through the COVID-19 pandemic.

  The Fed started hiking rates in 2022 in response to a surge in inflation, fueled largely by a post-pandemic supply crunch and Russia’s war on Ukraine. It has held its key lending rate at a two-decade high of between 5.25 and 5.50 percent for the past 14 months, waiting for economic conditions to improve.

  Now, with inflation falling, the labor market cooling and the US economy still growing, policymakers have decided that conditions are ripe for a cut.

  Policymakers are left with a choice: Making a small 25 basis-point cut to ease into it, or a more aggressive cut of 50 basis points, which would be helpful for the labor market, but could also risk reigniting inflation.

  “I think that in advance of the November meeting, there’s not quite enough data to say we’re in jeopardy on the employment side,” said Alicia Modestino, an associate professor of economics at Northeastern University, who was previously a senior economist at the Federal Reserve Bank of Boston. Analysts see the smaller cut as a safe bet.

  “The Fed likes predictability,” Modestino said. “It’s good for markets, good for consumers, good for workers,” Modestino said.

  “So a 25 basis point cut now, followed up by another 25 basis point cut in November after the next round of economic data, offers a somewhat smoother glide path for the economy,” she added.

  While analysts overwhelmingly expect the Fed to start cutting this month, there is less clarity about what comes next. The Fed would shed some light on the issue on Wednesday, when it publishes the updated economic forecasts of its 19-member rate-setting committee — including their rate cut expectations.

  In June, Federal Open Market Committee (FOMC) members sharply reduced the number of cuts they had penciled in for this year from a median of three down to just one amid a small uptick in inflation.

  However, as inflation has fallen and the labor market has weakened, expectations of more cuts have grown.

  “We continue to expect three rate cuts of 25bp [basis point] each at the remaining 2024 FOMC meetings,” Goldman Sachs Group Inc chief economist Jan Hatzius wrote in a note to clients published on Thursday.

  Traders also see a greater than 99 percent chance of at least four more cuts next year, which would bring the Fed’s key lending rate down to between 3.5 and 3.75 percent — 175 basis points below current levels.
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