Jerome Powell, the chairman of the US Federal Reserve, is poised to announce what may be the first interest rate drop in 2025. At least, this is what the markets expect.
The FOMC meeting is taking place over two days — September 16 and 17, and the decision on the monetary policy will be announced on September 17.
The last rate cut was in December 2024 when the FOMC reduced rates by 50bps. Since then, the rates were kept unchanged largely on the belief that Trump’s tariffs could be inflationary.
What will Powell do on September 17
On the one hand, a sluggish employment market and on the other, rising inflation, are pulling the Fed in opposite ways.
Trump’s tariffs may not have impacted the prices of goods much, but inflation still remains sticky and drifting upwards.
However, what may force Powell and team to start the rate cut campaign is the job market. Signs of weakness in the job market have started emerging, with unemployment rising to 4.3%, declining job openings, rising job offs, and an increase in filings of job claims.
Still, the macro picture remains supportive with inflation falling from levels of around 9% seen a few years back. “US core inflation has slowed to 2.3% on a year-over-year basis, the softest since early 2021, while second-quarter GDP growth came in at 2.1%, showing steady expansion without overheating. We’re entering a sweet spot where inflation is easing, growth is steady, and the central bank is supportive,” says Nigel Green, CEO, deVere Group.
Will it be a 25bps or 50bps Rate Cut?
According to Polymarket, a prediction market, there is a 91% chance of a 25bps rate cut, while 7% predict a larger rate cut of 50bps.
Standard Chartered anticipates a 50 basis point reduction in interest rates by the U.S. Federal Reserve during its policy meeting this month.
As per the CME FedWatch tool, there is a 96.1% probability of a 25bps rate cut, while the odds for a 50bps rate cut are just 3.9%.
“The Fed will deliver a 25bp cut on Wednesday, though there will likely be both dovish dissents preferring a larger 50bp move, and hawkish dissents preferring to hold rates steady. Given those divisions, Powell is likely to emphasise optionality and the post-meeting press conference, while the updated dot plot should again point to a total of 50bp easing this year,” says Michael Brown Senior Research Strategist at Pepperstone.
Powell’s commentary after the rate cut announcement will be keenly watched by traders, investors and economists. The dot plot will also be released on September 17, indicating the direction of rates in the months ahead.
“Comerica forecasts the Fed to cut the federal funds target by a quarter percent at next Wednesday’s decision, but its path forward will be complicated.
If Powell repeats his “proceed carefully” language at the press conference following the decision, financial markets will interpret that as a signal that the Fed will likely hold rates steady at their next decision in October.
Comerica’s forecast anticipates the Fed making quarter percentage point rate cuts at every other decision between now and March (Sept, Dec, Mar), to implement Powell’s ‘proceed carefully’ strategy,” says Bill Adams, Chief Economist for Comerica Bank.