Monday, December 23, 2024

Fed officials set to cut rates for the first time in 4 years

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The Federal Reserve is widely expected to cut interest rates for the first time in four years Wednesday and outline the path for future rate cuts.

Investors have been hoping for a larger half-percentage-point cut versus a quarter-point cut. Traders, in recent days, have increased their wager that the central bank will cut by a deeper 50 basis points. Wednesday morning, Fed funds futures were pricing in a better than 60% chance the Fed cuts by 50 basis points, up from just 15% odds a week ago.

“The Fed cutting by 50 basis points is a real possibility,” said Wilmer Stith, bond trader for Wilmington Trust, who just last week thought it was more likely the central bank could cut by 25 basis points. He’s on the fence, though, as to whether it actually happens.

Read more: What the Fed rate decision means for bank accounts, CDs, loans, and credit cards

Ahead of the blackout period, which started Sept. 7, comments from Fed officials indicated they are more likely to trim their benchmark interest rate by a quarter percentage point. That would mean a new range of 5.0-5.25% from its 23-year high of 5.25% to 5.5% when their policy meeting concludes this afternoon.

WASHINGTON, DC - JUNE 12: Federal Reserve Bank Chair Jerome Powell announces that interest rates will remain unchanged during a news conference at the Federal Reserves’s William McChesney Martin building on June 12, 2024 in Washington, DC. Following the two-day Federal Open Markets Committee meeting Powell said the Fed has decided to keep their current rate range of 5.25-5.50 percent and signaled that it believes long-run rates will stay higher than previously indicated.  (Photo by Kevin Dietsch/Getty Images)

Federal Reserve Bank Chair Jerome Powell this past June. (Kevin Dietsch/Getty Images) (Kevin Dietsch via Getty Images)

Either way, the Fed’s actions will officially mark the termination of the most aggressive inflation-fighting campaign since the 1980s. The rate cut will mark the first in a series of cuts, with intense focus on the Fed’s new interest rate projections, known as the so-called dot plot, for how many rate cuts officials see for the remainder of this year and next.

JPMorgan chief economist Michael Feroli is one who believes the Fed needs to cut by a bigger amount.

“What the Fed should do is clear: Recalibrate the policy rate 50 basis points lower to adjust for the shifting balance of risks,” said Feroli.

As inflation has continued a slow downward descent, officials are turning more attention to the job market, which has weakened, with Fed Chair Jay Powell pledging to do everything to maintain a strong job market.

Feroli sees a 50 basis point cut Wednesday, with guidance for two 25 basis point cuts at the last two meetings of the year.

But former Kansas City Fed president Esther George expects a quarter-point cut with the potential for Powell to lay the groundwork for deeper cuts in subsequent meetings.

Who’s right? We’ll see, of course. But it could take a lot to form a consensus around the FOMC table to vote unanimously for a 50 basis point cut.

Some of the committee members, including Fed governor Michelle Bowman, Atlanta Fed president Raphael Bostic, and Philadelphia Fed president Patrick Harker, had indicated that starting with 25 basis points made sense and they weren’t alarmed by the cooling in the labor market.

In contrast, in Jackson Hole in late August, Powell struck a dovish stance with comments that indicated he could be in favor of a 50 basis point cut, saying the Fed “will do everything we can to support a strong labor market as we make further progress toward price stability.” He noted that the Fed does not “seek or welcome further cooling in labor market conditions” and that the current level of the policy rate gives the Fed “ample room” to lower rates in response to any weakening in the job market.

WASHINGTON, D.C., Aug. 27, 2020 -- Photo taken on Aug. 26, 2020 shows the U.S. Federal Reserve HQ in Washington, D.C., the United States.
  A resurgence of COVID-19 infections in the fall could drag the U.S. economy into a double-dip recession, a senior U.S. Federal Reserve official said on Wednesday. 
  WASHINGTON, D.C., Aug. 27, 2020 -- Photo taken on Aug. 26, 2020 shows the U.S. Federal Reserve HQ in Washington, D.C., the United States.
  A resurgence of COVID-19 infections in the fall could drag the U.S. economy into a double-dip recession, a senior U.S. Federal Reserve official said on Wednesday.

Will the Fed cut by more than a quarter point? The Federal Reserve HQ in Washington, D.C. (Ting Shen/Xinhua via Getty) (Xinhua News Agency via Getty Images)

In any case, Powell will have to explain the interest rate decision and projections in the press conference following the meeting. He’ll either set expectations for deeper, more aggressive cuts or say the Fed is expected to take a measured, gradual approach and is prepared to take more aggressive action if warranted.

Lots of changes to the language in the Fed’s policy statement are also expected to reflect the Fed’s decision to start a rate cutting cycle, including that officials have gained confidence inflation is falling sustainably to their 2% target, that officials are more focused on weakness in the labor market now, and that the timing and size of future cuts will depend on the data.

In addition to their policy decision and interest rate projections, Fed officials will also release forecasts for unemployment, inflation, and the economic outlook. Fed Chair Powell will hold a press conference at 2:30 p.m. ET.

Jennifer Schonberger is a veteran financial journalist covering markets, the economy, and investing. At Yahoo Finance she covers the Federal Reserve, cryptocurrencies, and the intersection of business and politics. Follow her on X @Jenniferisms.

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