With just three days until the September FOMC meeting, market expectations are leaning toward a 25-basis point rate cut, though there’s still some speculation about the possibility of a larger 50-basis point reduction. If the Federal Reserve does make this move on September 18, it would mark the first rate cut over four years, potentially shaping the tone for monetary policy through the rest of 2024.
Recent economic data suggests a more cautious approach may be warranted. The CPI for August was 2.5%, while core inflation, excluding the volatile food and energy sectors, increased by 0.3% month-over-month. Inflation remains above the Fed’s 2% target, driven largely by shelter costs. Since inflation has not yet eased to the target level, this could explain why the central bank might opt for a more measured pace in cutting rates. On the other side, unemployment fell to 4.2% in August, while non-farm payrolls rose by 142,000. However, unemployment has been gradually rising throughout 2024, and while the August jobs report provided some reassurance, the overall picture suggests a cooling labor market. This, combined with inflation still above target, may lead the FOMC to hold off on more aggressive rate cuts in the near term.
A 50-basis point rate cut by the Fed could be seen as an indication that the central bank believes it has fallen behind and needs to shift to a more supportive monetary policy. Such a sizable cut might also suggest early signs of financial instability, which generally isn’t viewed positively. Large rate cuts of this magnitude are uncommon outside of periods of economic turmoil. The most recent instance occurred in March 2020, in response to the Covid-19 pandemic, and before that, during the 2008 Global Financial Crisis. It’s worth noting that the Fed has not made a cut exceeding 25 basis points outside of a crisis since November 2002.
The Fed’s decision on September 18 will set the stage for the balance between inflation control and economic support for the remainder of 2024.
Fed’s September Decision Could Break Four-Year Rate Streak – Century Financial
