What to Expect from the Federal Reserve’s Interest Rate Decision

When Federal Reserve officials meet on Wednesday, there is a possibility that they might make a surprise decision. While Fed officials have indicated their intention to cut the central bank’s key interest rate at this week’s pivotal meeting, financial market participants are uncertain about the magnitude of the cut. The odds of a 50 or 25 basis point cut have swung wildly in recent weeks, creating uncertainty about the Fed’s next move.

Unusual Uncertainty

The fact that market participants are so divided on what will happen this close to the central bank’s next meeting is unusual. Normally, central bankers do not make public statements about monetary policy during the 10-day “blackout period” leading up to every Federal Open Market Committee meeting. However, investors, economists, and experts can usually predict the Fed’s next interest rate move based on news and economic data.

Predictability is Key For the Fed

The predictability of the Fed’s moves is no accident. The Fed and other central banks around the world generally try to avoid last-minute surprises to financial markets, as they believe monetary policy is more effective when it is predictable. However, recent economic data has been mixed, leading to fluctuations in rate cut expectations in the days leading up to the meeting.

Sophia Kearney-Lederman, senior economist at FHN Financial, expects markets to stabilize in favor of either a larger or smaller cut before the meeting. She believes that the oscillation in expectations has been a reflection of the data seen in the past month and a half.

If the odds remain in the middle, with an equal chance of a larger or smaller cut, it could be the biggest rate cut “surprise” in more than 15 years, according to economists at Deutsche Bank.

The Fed’s Balancing Act

The unsettled predictions reflect the difficult decision that Fed policymakers face. The Fed is preparing to reverse the campaign of interest rate hikes it started in March 2022 to subdue a spike in inflation. The hikes were aimed at discouraging borrowing and spending to cool down an overheating economy. Since then, the inflation rate has fallen, and the Fed’s high interest rates have slowed the economy. The Fed’s mission is to keep interest rates low enough to prevent mass layoffs but high enough to keep a lid on inflation.

Reports on inflation and the labor market have sent mixed signals about whether inflation or unemployment poses the greatest threat to the economy’s health. This has given rise to arguments for both cautious rate cuts and fast and furious rate cuts.

What Lies Ahead

The most consequential decision the Fed officials make this week may not be the magnitude of the rate cut, but the message they send about their future plans. The Fed’s policy announcement on Wednesday will include quarterly economic and interest rate projections by FOMC members. These projections will provide insight into how fast interest rates could fall in the coming months.

According to the CME’s FedWatch tool, the market is pricing in about a 65% chance that the Fed will cut at least 125 basis points from the benchmark rate by the end of the year. This suggests that the market expects 50-basis-point cuts at two of the remaining three policy meetings in 2024.

Overall, the uncertainty surrounding the Fed’s interest rate decision reflects the challenges faced by policymakers in balancing inflation and unemployment. The market will be closely watching the Fed’s announcement and projections for clues about future rate cuts.

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