“The time has come for policy to adjust.” With these simple words, Federal Reserve Chair Jerome Powell signaled at the Jackson Hole conference last month that interest rates are likely to be cut at the Fed’s September meeting.
As the Federal Open Market Committee decision at 2 p.m. ET Wednesday approaches, here’s what investors need to know:
1. Interest Rates Are Set To Be Cut
It’s almost certain the Federal Reserve will cut the fed funds rate from the current 5.25%-5.5% level.
This would mark the first rate cut since March 2020, when the central bank slashed rates in response to the pandemic-induced recession.
Also Read: From ‘Too Hot’ To ‘Time Has Come’: 10 Moments Powell Shed Light On Inflation
2. The Size Of The Cut Remains Uncertain
Unusually, there is still no consensus on the size of the upcoming rate cut. According to the latest market-implied odds, investors are pricing in a 50-basis-point rate cut with a 59% probability.
The remaining odds suggest a smaller 25-basis-point move.
Historically, the Fed has started a rate-cutting cycle with a 50-basis-point reduction.
| Potential Rate Cut Size | Probability |
|---|---|
| 50 basis points | 59% |
| 25 basis points | 41% |
3. Wall Street Analysts Predict 0.25% Cut
An overwhelming majority of Wall Street analysts expect the Federal Reserve to cut rates by 0.25 percentage points.
Their rationale is that the economy remains resilient and does not require a significant rate cut, especially with inflation still above target.
Additionally, a larger 50-basis-point cut could be seen as politically charged, as this meeting is the last before the November presidential election.
4. All Eyes On Dot Plot
Alongside the rate decision, the Fed will release its updated Summary of Economic Projections, covering growth, inflation and the expected path of the Fed funds rate.
The “‘dot plot,” which maps out FOMC members’ expectations for future rate moves, will be closely watched. In June, the average dot indicated only one rate cut by the end of this year, followed by 100 basis points of cuts in both 2025 and 2026.
Market participants now anticipate a more aggressive forecast for rate reductions.
5. Let Powell Speak
The rate decision and the economic projections will be unveiled at 2 p.m. ET, but traders will be glued to Chair Jerome Powell‘s press conference starting at 2:30 p.m. ET.
Powell will likely face tough questions regarding the rationale behind the day’s decision and the Fed’s approach to the upcoming rate-cutting cycle.
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