The US Federal Reserve is set to announce its monetary policy decision today at 11:30 PM, September 18.
Markets are widely expecting a 25-basis-point cut in the key interest rate, marking the first reduction in four years. While a rate cut is highly anticipated, the key question is whether the Fed will opt for a 25 or 50 basis point reduction.
“The Federal Reserve is expected to kick off a series of rate cuts on Wednesday, after having completed last year the most aggressive rate hike campaign in four decades. For investors, a key question may be whether the Fed will cut rates in time to avert a potential economic slowdown,” said Amit Goel, Co-Founder and Chief Global Strategist at Pace 360.
‘It is pertinent to note the bonds do much better in rate-cutting cycles which lead to a recession than they do in cycles which do not end in a recession,” he added.
The Fed has completed its most aggressive rate hike campaign in four decades. Now, attention is shifting to whether the upcoming rate cut will come in time to avoid a potential economic slowdown.
All eyes will be on Fed Chair Jerome Powell’s remarks, especially on inflation and employment.
Powell’s speech is expected to offer insights into the health of the US economy and could shape market sentiment, both in the US and globally. His comments will also give an idea of the pace of future rate cuts.
Here are five key factors that will likely influence today’s rate decision:
US inflation
While headline inflation showed positive signs, underlying inflation rose unexpectedly in August. The increase in costs, especially in housing and travel, has made a larger rate cut less likely.
The US Consumer Price Index (CPI) slowed to 2.5% in August from 2.9% in July, reaching its lowest annual rate since February 2021, according to the Bureau of Labor Statistics. However, the rise in core inflation has raised concerns.
Unemployment rate
The unemployment rate dropped slightly to 4.2% in August from 4.3% in July. Despite this small decline, the figure remains significantly above the April 2023 low of 3.4%.
Although the Fed has brought inflation closer to its 2% target, the rising unemployment rate is still a worrying trend, which could affect how much the Fed cuts rates.
Manufacturing sector
The US manufacturing sector contracted for the 11th time in 12 months, signalling weak demand. The ISM Manufacturing PMI stood at 47.2 in August.
Although factory production increased by 0.9% in August, primarily due to a rebound in motor vehicle output, July’s data was revised to show a decline of 0.7%, suggesting that manufacturing has been mostly stagnant.
This weak performance adds pressure on the Fed to act cautiously when deciding on rate cuts.
Job openings
A decline in job openings is often seen as a sign of a cooling labour market. Job openings in July fell to their lowest point since January 2021. The US economy added only 142,000 jobs in August, much lower than expected.
This could prompt the Fed to lean toward a larger 50-basis-point cut, as a weaker labour market may need stronger support.
Yield curve
The yield curve, which measures the gap between the 10-year and 2-year yields, has been a key recession indicator. Recently, the yield curve ‘un-inverted’, which typically signals positive economic outlooks.
However, because the curve had been inverted for two years, many fear a recession could still be on the horizon, similar to what happened in 2001 and 2007. The increased recession risk might push the Fed towards a more aggressive rate-cutting strategy in the months ahead.