The Federal Reserve (Fed), the central bank, will hold a monetary policy meeting on the 17th and 18th to effectively end the war against inflation that has continued for over two years and decide to start cutting interest rates. As Fed members are struggling to decide on the size of the first cut, experts are fiercely divided on whether the cut will be the typical 25bp (1bp = 0.01% point) or a “big cut” (50bp interest rate cut).
According to the Fed on the 17th, the Federal Open Market Committee (FOMC), which determines the Fed’s monetary policy, will announce the results of its meeting at 2:00 PM Eastern Standard Time on the 18th (3:00 AM Korean Standard Time on the 19th) after a two-day meeting. Jerome Powell, Chairman of the Federal Reserve, announced at the Jackson Hole Meeting on the 23rd of last month that “the time for policy adjustment (rate cut) has arrived,” and predicted a rate cut in September.
Regarding the future path of monetary policy, he said, “The timing and pace of the cut will be determined by incoming data, the changing economic outlook, and the balance of risks,” leaving open the possibility of a 50bp rate cut. Economic indicators released over the past 20 days since his Jackson Hole speech have confirmed to the market that there will be no change in the Fed’s September rate cut.
The August employment report suggested that although the increase in jobs was greater than in July, the labor market cooling is continuing, and the August consumer price index (CPI) rose 2.5% year-on-year, the lowest in three years and six months.
Lael Brainard, former Vice Chairman of the Federal Reserve and Director of the White House National Economic Council, issued a statement after the CPI data was released, saying, “It shows that we are moving away from inflation.” If the Fed cuts interest rates this time, it will be the first rate cut in four and a half years since March 2020, when it urgently lowered interest rates in response to the pandemic crisis. In response to the surge in prices due to shocks such as pandemic relief measures and supply chain disruptions, the Fed raised the base rate to 5.25-5.50%, the highest level in 22 years, from March 2022 to July of last year, and has maintained it there since.
Although the August inflation and employment indicators confirmed the Fed’s September rate cut, the general assessment of Wall Street experts is that they did not provide any clear evidence as to how fast the rate cut would be. They say that the labor market is cooling, but not at a rate fast enough to justify a big cut. In a situation where economic indicators are ambiguous, the interest rate outlook is in sharp contrast to the conflicting views on the possibility of a soft landing for the U.S. economy.
The current U.S. economic situation is not deteriorating so rapidly that a 50bp cut is needed, and the “gradualists” who predict a 25bp cut believe that if the Fed suddenly implements a big cut, it will only cause confusion in the market. On the other hand, some influential figures, such as former New York Federal Reserve Bank President William Dudley, believe that a big cut is inevitable to quickly return monetary policy from the current tightness level to a neutral level. In his contribution last July, former Governor Dudley urged the Fed to cut rates early, diagnosing that “it may already be too late to prevent a recession through rate cuts.”
While Wall Street is fiercely debating whether or not to make a big cut, Nick Timiraos, a reporter for the Wall Street Journal (WSJ) who is often called the Fed’s “unofficial spokesman” for his ability to accurately gauge the intentions of senior Fed officials, wrote in an article on the 12th that “the decision on the rate cut size is likely to be a close one.” The financial market is also hesitating over whether the September cut will be 25bp or 50bp.
According to the FedWatch of the Chicago Mercantile Exchange (CME), the interest rate futures market reflected the probability of a 50bp cut as low as 14% on the 11th, a week before the FOMC meeting, but then raised it back to around 50% after Timiraos reported that a close decision was expected. Some on Wall Street are also saying that we should pay more attention to how the Fed’s monetary policy easing moves will continue in the future. John Faust, a former senior advisor to Chairman Powell, said, “Whether the first cut is 25bp or 50bp seems to be a close call, but the extent of the cuts in the coming months will be much more important.”
The Fed is planning to release its economic outlook report after its September meeting. In the dot plot released in June, a majority of Fed members suggested a 4.0-4.25% interest rate level by the end of 2025.