The US Federal Reserve is gearing up for a much-anticipated interest rate cut next week, with a 25 basis point reduction looking most likely. This would mark the first in a series of cuts aimed at addressing recession risks, despite persistent inflationary pressures.
Recent inflation data revealed that the Consumer Price Index (CPI) increased by 2.5% year-over-year in August, down from 2.9% in July. However, core inflation, which excludes the more volatile food and energy sectors, stayed at 3.2%, keeping the Fed cautious. Notably, housing costs have risen for the first time since March 2023, suggesting that inflation risks are still present.
Traders and economists largely agree: a quarter-point cut at the September 17-18 meeting is the most likely outcome. The probability of a more aggressive 50 basis-point cut has dropped to less than one in five. Despite a mixed August jobs report, the chances of a major rate cut remain slim, with markets expecting gradual easing rather than sudden shifts.
Employment data showed that U.S. hiring slowed, but the unemployment rate fell to 4.2% in August, giving the Fed confidence that the labor market doesn’t require immediate aggressive support. Following its September meeting, the central bank is expected to continue cutting rates by 25 basis points in both November and December to gradually adjust policy to evolving conditions.
Speeches by New York Federal Reserve President John Williams and Fed Board Governor Christopher Waller late last week didn’t give a clear indication of a large rate cut, reinforcing the likelihood of a gradual approach. The majority of economists polled by Reuters expect a quarter-point cut.
The concern is that cutting rates too quickly—by 50 basis points—could be interpreted by the market as a sign that the Fed is behind schedule and needs to adopt a more accommodative stance rather than return to a neutral policy. Economists caution that a more aggressive cut could send the wrong message about the health of the economy.
The latest survey estimates the probability of a recession at around 30%, a figure that has stayed consistent throughout the year despite worries about a potential economic slowdown. Projections indicate further Fed rate cuts in 2024, which would support the US economy in growing at or above 1.8%, the non-inflationary growth rate the central bank has set as its target.
As a result, next week’s 25 basis point rate cut will mark the initial step toward a more accommodative monetary policy. The Fed's goal is to manage inflation while preventing a steep slowdown in economic growth.
Login in Personal Account
153