The Fed’s interest rate decision significantly impacts markets, and there were 21 hours left until the decision at the time of writing. The market expectation is for rates to remain unchanged. However, the important details will be in the Fed’s statement and Powell’s speech. Here are the expectations.
Fed Interest Rate Assessment
Interest rates have reached the highest level in 23 years and have been at their peak for a year. This challenging period for investors, with rapid increases and poor inflation data in the first quarter of this year, has made 2024 difficult for crypto. The next meeting will be held on September 17-18, and if the Fed is to signal a rate cut, it needs to do so at this meeting.
Economists generally believe that Powell will seek more evidence that the 2% inflation target is being approached at this meeting. Indeed, the recent PCE data exceeded expectations, and this data is the inflation indicator monitored by the Fed.
According to FactSet, about 9 out of 10 economists say the first rate cut will be in September. The recent inflation data and the downward revision of Non-Farm Payroll figures have also shifted the FedWatch rate in this direction.
Ryan Sweet, Chief U.S. Economist at Oxford Economics, wrote in his latest assessment that the rate cut process is already strongly accepted and that we might hear things about a September cut at the July meeting. Although Fed members foresee only one cut for this year, inflation figures announced before and after this projection could change things in favor of a cut.
Rate Cut Predictions
CME FedWatch suggests that there could be cuts in the September, November, and December meetings due to faster-than-expected falling inflation. The probability of three rate cuts in 2024 is 64%. Indeed, in the previous dot plot announced by the Fed for 2024, the median cut estimate by members was 75bp, indicating three cuts. Poor data in the first quarter had led to a revision against risk markets.
After inflation peaked at 9.1%, a 40-year high, it has now dropped to 3%. This, combined with Fed Chairman Powell’s recent statement, “We will start cutting before it drops to 2%,” shows that expectations for September are not unreasonable. Indeed, the Fed now says it is holding meetings where the risks of excessive tightening are also being discussed.
The Fed has two primary tasks, referred to as its dual mandate. The first is to keep prices stable, preventing abnormal fluctuations in inflation. The second is to achieve maximum employment. With inflation now down to 3%, we have reached a point where an urgent rate cut scenario motivated by excessive loosening in employment is unnecessary. However, employment has loosened in this process, meaning that if the Fed keeps markets tight for longer, it could achieve one of its mandates while failing the other. Powell certainly does not want this.
Moreover, households are now struggling due to high interest rates. Since LendingTree began tracking interest rates in 2019, the average credit card interest rate has climbed to its highest level of 24.84%.
