The U.S. Federal Reserve began a two-day discussion on interest rates at 3:30 PM today, expected to culminate in its first rate cut since March 2020, as inflation continues to decline.
The Fed will announce its rate decision tomorrow evening.
Policymakers are anticipated to debate whether to implement a modest cut of a quarter percentage point or a more aggressive half-point reduction to the benchmark lending rate.
The Fed is in a favourable position entering this meeting, with U.S. inflation approaching its long-term target of 2% and a resilient yet cooling labour market.
This data raises hopes that the Fed may achieve the rare feat of reducing inflation to target levels without causing a recession, known as a “soft landing.”
While a half-point cut could more significantly lower borrowing costs, it also carries the risk of reigniting inflation, making it less likely to receive support from Fed policymakers, according to KPMG chief economist Diane Swonk. She stated:
“A larger half-point cut will likely be discussed during the meeting, but Fed Chairman Jay Powell probably won’t have enough support to push it through in September.”
Regardless, we still expect to see a total of one percent in cuts before the year ends, which could include at least one substantial cut in September, November, or December.
Futures markets indicate a roughly 65% probability that the Fed will announce a half-point cut on Wednesday, according to CME Group data.
