US Federal Reserve Poised For Third Consecutive Rate Cut: What You Need To Know

The US Federal Reserve is expected to cut interest rates by a quarter point on Wednesday. This will be the third rate cut in a row. The move is considered one of the Fed’s actions to boost economic growth but also to address inflation concerns.

Over the last two years, the Federal Reserve has been able to make some good strides in managing inflation. It has done so mainly through a series of interest rate hikes. With the current economic climate, however, the Fed has started to reverse its stance and has opted for rate cuts to boost demand in the economy and support the labor market.

Despite having edged away from the Fed’s long-term target of 2%, recently rising inflation is not clearly of the temporary variety or possibly foreshadowing a more fundamental problem. As such, despite these anxieties, financial markets continue to widely anticipate that on Wednesday, the Fed will decide to lower the benchmark lending rate by a quarter-point and so into a target range of 4.25% to 4.5%.

Market Expectations

Moody’s Analytics Chief Economist Mark Zandi shared his perspective on the upcoming decision, stating, “If the Fed wasn’t going to do that, they would have dissuaded markets of that notion a long time ago.” With the Federal Reserve’s rate decision set to be announced at 2 pm on Wednesday (12:30 am Thursday in India), the focus will be on the central bank’s quarterly economic forecasts and a subsequent press conference by Fed Chair Jerome Powell.

Key Points To Watch In Fed’s Rate Decision

Cut Expectation: The US central bank is widely expected to trim by a quarter percentage point its benchmark rate, meaning a target range of federal funds between 4.25% and 4.5%, Bloomberg estimated on Thursday.

This will affect the economic forecasts. Even after the expected reduction in the rate, the newly set benchmark rate will be very much above the 2.9% median outcome of the Fed’s last meeting in September.

Dot Plot and Future Rate Cut: The most closely monitored part of the Fed’s revision will be the “dot plot,” which reflects the projected rate. Economists expect officials to indicate up to three more rate cuts in 2025.

Fed’s Language and Approach: Fed’s statement would likely be like that of November by stating that “the risks to achieving the Fed’s goals for employment and inflation are roughly in balance.” According to the economists at Barclays, it is expected that the Fed will stress that a slow and gradual approach of reducing interest rates is needed.

Possible Stability in January: Fed may hold rates steady in January after this week’s expected cut, according to Tim Duy, chief US economist for SGH Macro Advisors.

This meeting will pose a delicate balancing act between the need for economic growth and its stated commitment to controlling inflation ahead of the Federal Reserve’s decision. Results from Wednesday will give a glimpse into what the central bank will have in store for the remainder of 2024 and beyond.

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