The Federal Reserve is gearing up to make a significant move by cutting its benchmark interest rate, a decision that could lead to reduced borrowing costs for consumers and businesses just ahead of the upcoming presidential election. The last time the Fed took such action was more than four years ago.
There is a sense of uncertainty surrounding this week's meeting as the exact magnitude of the rate cut remains unclear. While some anticipate a standard quarter-point reduction, others believe there is a growing possibility of a larger half-point cut being announced.
With inflation hovering slightly above the Fed's target level, the central bank has been shifting its focus towards supporting a weakening job market and aiming for a 'soft landing' scenario, where inflation is curbed without triggering a sharp recession. A half-point rate cut would signal the Fed's commitment to sustaining healthy economic growth while addressing inflation concerns.
It is expected that this week's rate cut will be the first in a series of reductions that will extend into 2025. The move aims to lower borrowing costs for mortgages, auto loans, credit cards, and business loans, potentially stimulating business spending and boosting stock prices.
Fed Chair Jerome Powell recently expressed confidence in the Fed's success in controlling inflation, which has significantly decreased from its peak in June 2022. Factors such as slowing wage growth and declining oil and gas prices are contributing to the cooling of inflation.
While unemployment has risen slightly from its historic low, it is largely attributed to new job seekers entering the market rather than layoffs. Powell emphasized the Fed's commitment to supporting a strong labor market and indicated that any further weakening would be unwelcome.
The decision on the rate cut hinges on how quickly the Fed aims to reach a 'neutral' interest rate level that neither hampers nor accelerates economic growth. Analysts are divided on whether a half-point or quarter-point reduction is more likely, with considerations on the current state of inflation and economic growth.
As anticipation builds around the Fed's impending rate cut, borrowing rates have already started to decline in response to signals from Powell and other Fed officials. Mortgage rates have dropped to an 18-month low, and other rates, such as the yield on the five-year Treasury note, have also seen decreases.
