US Federal Reserve may announce a rate cut this Wednesday
What's the story
The US Federal Reserve is preparing to announce its first interest rate reduction in over four years, this Wednesday. This decision comes as inflation approaches the bank's long-term goal of 2%, and the labor market shows signs of slowing down. The central bank's dual mandate from Congress, to ensure both stable prices and maximum sustainable employment, will guide this decision based solely on economic data.
Political implications
Decision could impact upcoming US presidential election
The timing of the rate cut could potentially influence the upcoming US presidential election, where former Republican president Donald Trump is pitted against current Democratic vice president, Kamala Harris. Alicia Modestino, an associate professor of economics at Northeastern University, acknowledged this dynamic stating, "As much as I think the Fed tries to say that they're not a political animal, we are in a really wild cycle right now."
Decision factors
Policymakers to decide on extent of rate cut
The debate among policymakers this week will focus on whether to implement a 25 or 50 basis point reduction. This would be the Fed's first rate cut since March 2020, when it drastically reduced rates to near-zero in response to the COVID-19 pandemic. The central bank has maintained its key lending rate at a two-decade high of between 5.25-5.50% for the past year, awaiting improved economic conditions.
Market expectations
Analysts predict a cautious approach to rate reduction
Analysts predict a cautious 25 basis point cut as the most likely outcome. Economists at Bank of America stated in a recent note to clients, "We expect the Fed to cut by 25bp (basis points)." Modestino echoed this sentiment, suggesting that a smaller initial cut followed by another after further economic data review, could provide a smoother transition for the economy.