Investors, economists, and executives eagerly await a cut in the federal funds rate today. The size of the Federal Reserve’s September rate cut today is up in the air. However, cuts are set to begin, which could provide a much-needed boost to interest-rate-sensitive industries, the labor market, and growth.
Expectations For Today’s Interest Rate Decision
The Federal Reserve is likely to cut the federal funds rate today. However, while an interest rate cut is expected, market expectations are divided about the chance of a 0.25% or a 0.5% rate cut.
As of September 18 at 8:29 a.m. ET, the CME FedWatch tool reflected the odds of a 0.5% rate cut at 45%, with the odds of a 0.25% rate cut at a higher 55%. These odds have changed greatly in the past week. In fact, the odds of a 0.5% rate cut was only 14% on September 11.
Weighing The Fed’s Dual Mandate
The Fed has a dual mandate to foster full employment and keep prices low and stable.
The labor market is solid, with a low unemployment rate of only 4.2% in August and almost 7.7 million open jobs in July. Jobless claims also remain relatively low.
However, inflation remains elevated, with year-on-year Total CPI up 2.5% and Core
Core
Since inflation is elevated, this is likely to keep the Fed from raising rates very quickly or significantly.
Federal Open Market Committee Forecasts
While financial market participants will be watching the Fed’s interest rate decision closely, they will also be paying close attention to the forecasts of the Federal Open Market Committee — or FOMC. Most important will be the FOMC member median forecasts of future interest rates.
A table of all the FOMC forecasts will be released today at 2 p.m. ET, including interest rates, GDP growth, PCE inflation, and the unemployment rate. The forecasted interest rates also appear in a graphic depiction that economists and analysts refer to as the dotplot, which shows anonymized individual FOMC member forecasts of future interest rates.
Prestige Economics expects the dotplot of Median FOMC member forecasts are likely to convey that the Fed members expect to enact additional rate cuts in 2024 and 2025. Any change from the June 2024 dotplot will be critical for financial markets.
The last set of FOMC forecasts from June 2024 reflected that the FOMC median forecast of interest rates for the end of 2024 was 5.1%, for the end of 2025 was 4.1% in June, and for the end of 2026 was 3.1%. Fed member forecasts of jobs and GDP growth were still generally positive in June.
Market Implications
If the median end-of-year expectations for interest rates fall in the September FOMC forecasts, this would likely weigh on the dollar and bond yields, while also being supportive of equity, industrial commodity, and bond prices.
Following the FOMC statement and forecasts, a great deal of attention will be paid to Fed Chair Powell’s remarks in his press conference, especially the timing of future additional Fed interest rate cuts. He is likely to reiterate the notion that Fed policy is not on a set course and that the FOMC will be data-dependent in their decision-making.
What do you expect from the Fed’s policy decision and FOMC member forecasts today?
Let me know in the comments below.
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