Will the Fed's Rate Cut Signal a New Economic Era? Key Insights from September's Meeting

The US Federal Reserve's two-day monetary policy meeting is set for September 17-18, with Fed Chair Jerome Powell anticipated to announce the central bank's first interest rate cut in over four years. The Federal Open Market Committee (FOMC) meeting will conclude with a rate announcement scheduled for 2 p.m. (EST) on September 18, which will be 12:30 a.m. IST on September 19.

In addition to the interest rate decision, Powell is expected to release the central bank's updated economic projections for the US.

What to Expect

Senior Fed officials have suggested that a rate cut is likely as inflation trends towards the central bank’s 2% target and the labor market shows signs of cooling. This potential rate cut would be the first since 2020, coming ahead of the US presidential elections in November 2024. Analysts anticipate that the primary discussion among Fed policymakers will center on the size of the cut.

Rate Cut Size: What’s the Likely Move?

During the September 17-18 meeting, policymakers will consider whether to implement a 25 basis point (bps) or a more substantial 50 bps cut. The decision involves balancing a moderate 25 bps cut to gradually ease into the new policy or a more aggressive 50 bps cut aimed at supporting the labor market, despite potential inflationary risks.

While many analysts expect the Fed to initiate rate cuts in September, there is uncertainty about subsequent actions. The central bank’s updated economic forecast, set to be released on September 18, is anticipated to shed light on future policy directions and rate cut expectations.

Significance of the Rate Cut

The potential rate cut is notable as it would be the Fed's first reduction since March 2020, when rates were slashed to near-zero to support the economy through the COVID-19 pandemic. The Fed had started raising rates in 2022 in response to rising inflation driven by post-pandemic supply issues and geopolitical events. For the past 14 months, the Fed has maintained its key lending rate between 5.25% and 5.50%, awaiting improved economic conditions.

With inflation decreasing, the labor market cooling, and the US economy continuing to grow, policymakers believe the time is right for a rate cut. This decision comes just two months before the presidential election, adding a layer of political sensitivity. Alicia Modestino, an associate professor of economics at Northeastern University, noted that the Fed’s actions are scrutinized in this high-stakes political climate.

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