Key points
- An unusual climate of uncertainty hangs over Wednesday’s Federal Reserve meeting.
- Why? No one knows for sure whether the Fed will cut its benchmark rate by a quarter point, as is usually the case, or by a half point, which is more aggressive.
- Beyond that, the central bank will provide new projections for where rates will be in the coming months.
WASHINGTON (AP) — After nearly bringing inflation under control, the Federal Reserve The U.S. central bank is about to do something it hasn’t done in more than four years: cut its benchmark interest rate, a move that should lead to lower borrowing costs for consumers and businesses, just weeks before the end of the year. presidential election.
Still, an unusual air of uncertainty hangs over this week’s meeting: It’s unclear how deep the Fed’s rate cut will be. Wall Street traders and some economists are predicting a growing likelihood that the central bank will announce a larger-than-usual half-point cut. Many analysts are predicting a more conventional quarter-point cut.
With inflation barely above their target level, Fed officials have focused their efforts on supporting a sagging labor market and achieving a rare target. “soft landing” The Fed has reduced inflation without triggering a sharp recession. A half-point rate cut would signal that the Fed is as committed to supporting healthy economic growth as it is to beating high inflation. This week’s decision is expected to be just the first in a series of Fed rate cuts that will extend through 2025.
High interest rates and high prices The price of everything from groceries to gas to rent has fueled public disillusionment with the economy and provided a line of attack for former President Donald Trump. Vice President Kamala Harris, meanwhile, has said Trump’s promise to impose tariffs on all imports would lead to even higher prices for consumers.
Over time, the Fed’s rate cuts should lower borrowing costs for mortgages, auto loans, and credit cards, as well as business loans. Business spending could increase, as could stock prices. Businesses and consumers could refinance their loans into lower-rate debt.
Chairman Jerome Powell made this clear last month in a highly publicized speech. Jackson Hole, Wyomingthat Fed officials are confident that inflation has been largely brought under control. It has fallen from a peak of 9.1% in June 2022 to 2.5% last monthnot far from the Fed’s 2% target. Central bank officials have battled soaring prices by raising their benchmark interest rate 11 times in 2022 and 2023 to a two-decade high of 5.3%, in an attempt to slow borrowing and spending, which ultimately cooled the economy.
Wage growth has since slowed, removing a potential source of inflationary pressure. And oil and gas prices are falling, a sign that inflation is likely to continue to slow in the months ahead. push back against high prices, force these companies like Target and McDonald’s to offer deals and discounts.
Yet after several years of strong job growth, employers have slowed hiring and the unemployment rate has risen. got up Unemployment has fallen nearly a percentage point from its half-century low in April 2023, to a still-low 4.2%. Once unemployment hits that level, it tends to keep rising. But Fed officials and many economists note that the rise in unemployment largely reflects an increase in the number of new workers looking for work — including new immigrants and recent college graduates — rather than layoffs.
“We will do everything in our power to support a strong labor market,” Powell said in Jackson Hole. He added that any “further weakening” of the labor market would be “undesirable.”
Some analysts say the statement suggests Powell would favor a half-point rate cut. Other economists still think a quarter-point reduction is more likely.
The question is how quickly the Fed wants to lower interest rates until they are no longer a drag on the economy, or an accelerator. It is unclear where that so-called “neutral” level is, although many analysts put it between 3 and 3.5 percent. Economists who favor a half-point cut argue that the Fed’s benchmark rate is much higher than necessary now that inflation is receding.
Others point out that the Fed typically cuts rates by a half-point or more only in emergencies. The last time it made a similar cut was in March 2020, when the pandemic shut down the economy. With consumers still spending and the economy likely to grow at a healthy pace in the July-September quarter, the most cautious Fed officials can argue that there is no rush to cut rates.
One encouraging sign is that while Powell and other Fed officials have signaled that rate cuts are coming, many borrowing rates have already fallen in anticipation. The average 30-year mortgage rate, for example, fell to 6.2% last week — the lowest level in about 18 months and down from a peak of nearly 7.8%, according to mortgage giant Freddie Mac. Other rates, such as the yield on five-year Treasury notes, which influences auto loan rates, have also fallen.
