(Bloomberg) — The Federal Reserve is widely expected to lower interest rates this week after holding borrowing costs at a two-decade high for more than a year.
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By how much, however, remains an open question.
Forecasters largely anticipate the Federal Open Market Committee will reduce rates by a quarter point to a range of 5% to 5.25%, though economists at JPMorgan Chase & Co. expect a bigger, half-point move. Investors see better-than-even odds of a half-point adjustment.
Fresh quarterly projections released at the conclusion of the central bank’s two-day policy meeting will offer further insight into the path ahead for borrowing costs and the economy.
Investors generally see a more aggressive path of reductions this year than the series of quarter-point cuts expected by economists. Financial markets have priced in more than a full percentage point of cuts before the year is out, implying at least one half-point cut.
Fed Chair Jerome Powell will need to strike a balance in the press conference between his own views, those of the committee and the message sent by the so-called “dot plot” of individuals’ rate projections — something that could prove challenging if the narratives differ.
The decision will be announced via a post-meeting statement at 2 p.m. on Wednesday in Washington. Powell will hold a press conference 30 minutes later. Here’s what to look for:
‘Dots’ and Economic Forecasts
Each quarter the Fed publishes what’s known as the Summary of Economic Projections, a compilation of policymakers’ individual forecasts for the federal funds rate, unemployment, economic growth and inflation. This week’s SEP will include projections for 2024 through 2027.
It will likely include a range of views for the path of interest rates this year. Several participants saw the case for lowering interest rates at the FOMC’s July meeting amid a pickup in unemployment and easing inflation. Since then, the labor market has weakened further. On the other hand, consumer prices excluding food and energy unexpectedly firmed in August, strengthening the case for moving with caution.
While the median dot may signal three quarter-point cuts this year, there are likely to be several officials who think the Fed should lower rates faster.
“There are a number of people who think this cut should be 50 basis points, or there should be a 50-basis-point cut later this year,” said Derek Tang, economist at LH Meyer/Monetary Policy Analytics. “The economy is softening quicker than they expected.”
The economic forecasts for this year will also be revised. The unemployment rate has already surpassed the Fed’s June projection of 4%, and the central bank’s preferred inflation metric — at 2.5% — has already fallen below the committee’s most recent median forecast.
FOMC Statement
The FOMC doesn’t vote on the forecasts, but they do vote on the statement. The document provides a qualitative description of how the committee as a whole sees the near-term outlook relative to their mandate of stable prices and maximum employment.
There are several possibilities for how the wording may change, including language around the balance of risks between employment and inflation.
The July statement said those risks “continue to move into better balance,” a line MacroPolicy Perspectives’ Julia Coronado and Laura Rosner-Warburton say is now out of step with recent comments from both Powell and Fed Governor Christopher Waller. Coronado and Rosner-Warburton said the FOMC could instead adopt a line similar to what Waller said on Sept. 6: “The balance of risks has shifted toward the employment side of our dual mandate.”
The committee may also choose to describe further weakening in the labor market as “unwelcome,” a Greenspan-era term Powell resurrected in a recent speech.
Economists are divided on whether and how policymakers would signal future cuts in the statement. Some 44% of economists surveyed by Bloomberg News said officials will acknowledge the possibility of further adjustments in the document, while 31% said they’d more explicitly state their intent to pursue a string of rate cuts and provide guidance on the pace.
Press Conference
The press conference will offer insight into not only the committee’s thinking but also Powell’s. Fed watchers judge that the chair is more uncomfortable with recent job market softening than the median committee voter.
Powell has grown increasingly encouraged the Fed can tame inflation with little cost to the economy and jobs. A jump in unemployment now would have high political and economic costs, a situation any central bank chief would want to avoid.
What Bloomberg Economics Says…
“The Fed is all but sure to kick off the rate-cut cycle at its Sept. 17-18 meeting. Whether they start with a 25- or 50-basis-point cut remains a close call. In our view, forecast coherence and risk management point to 50 basis points as the right choice. The absence of a clear steer — so far — on the possibility of a jumbo move points toward the 25-basis-point option.”
— Anna Wong, chief US economist
For the full note, click here
If officials do choose to lower rates by a quarter point, Powell has the latitude to signal he aims to guard against further deterioration in the job market.
“The message will be: We want extra ammunition on the table, but we aren’t going to use it today,” said Ellen Meade, a former senior adviser on policy and communication at the Fed Board who is now a research professor at Duke University.
New Voter
This Fed meeting will also be the first for Beth Hammack, the new Cleveland Fed president. The former Goldman Sachs Group Inc. veteran started in August and will cast a vote for the remaining policy decisions this year.
–With assistance from Catarina Saraiva.
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