Wall Street Uncertain as The Fed Mulls How Deep to Cut Rates
For the first time in four years the Federal Reserve is poised to cut its benchmark interest rate, which would lead to lower borrowing costs across the U.S. economy.
Despite the benefits for both consumer and businesses, which would be well-timed for Kamala Harris if the cut goes ahead in the run-up to the presidential election, the mood is uncertain in Wall Street with traders unclear how deep the cut will be.
Economists are currently split between those predicting the usual quarter-point cut also typical of other major Western economies such as the UK and Europe, and analysts who believe a more radical half-point reduction in interest rates is more likely.
Crucially, Fed Officials are keeping a close eye on inflation, which at 2.5% last month is barely above their 2% target, giving room to provide support to the weakening job market and achieving a "soft landing."
This is where inflationary effects are reduced without damaging economic growth, which has been relatively healthy in global terms at 3% in the second quarter of the year and up from 1.4% in the first quarter according to the Bureau of Economic Analysis.
Chair Jerome Powell stated last month in a high-profile speech in Jackson Hole, Wyoming, that Fed officials feel confident that inflation has largely been defeated, having plummeted from a peak of 9.1% in June 2022.
Central bank officials fought against spiking prices by raising their key interest rate 11 times in 2022 and 2023 to a two-decade high of 5.3% to try to slow borrowing and spending, ultimately cooling the economy.
However, Powell said "we will do everything we can to support a strong labor market." He added that any "further weakening" in the job market would be "unwelcome."
Fears for the jobs market on the part of the Fed do appear reasonable. After several years of strong job growth, employers have slowed hiring, with the unemployment rate up by nearly a full percentage point from its half-century low in April 2023.
The present rate is still historically low at 4.2%, however analysts have noted that once employment starts to rise it tends to keep climbing with Powell's comments lending credence to those economists foreseeing a half-point cut in interest rate.
A deeper cut like this could further stimulate economic growth and encourage business to hire new movers into the labor market, particularly from the new immigrants and recent college graduates who analysts believe could be reflected in higher unemployment rates at present.
Borrowing rates have already fallen in anticipation of a deeper cut in rates. The average 30-year mortgage rate dropped to 6.2% last week to the lowest level in 18 months and down from a peak of nearly 7.8%, according to the mortgage giant Freddie Mac.
Other rates, like the yield on the five-year Treasury note, which influences auto loan rates, have also tumbled.
This includes reporting from The Associated Press
