MENA Newswire News Desk: The Federal Reserve is approaching a critical decision on whether to cut U.S. interest rates by a quarter or half a percentage point. With its September meeting nearing, financial markets are leaning toward a more modest reduction, but the possibility of a larger cut remains. In the lead-up to the Federal Reserve’s meeting next week, hotter-than-expected inflation data has fueled market speculation about the size of the rate cut.
The CME FedWatch Tool has indicated that there is now a 45% chance of a 50 basis point cut, up from just 15% earlier in the week. However, some experts believe that the central bank is likely to opt for a more conservative 25 basis point cut. Eric Wallerstein, chief markets strategist at Yardeni Research, suggested that the Federal Reserve would avoid a larger cut unless the U.S. economy faces severe recessionary conditions. “Absent a financial crisis or deep recession, it’s unlikely the Fed will move beyond a 25 basis point cut,” according to Wallerstein.
Friday’s Consumer Price Index (CPI) report showed core prices in August rising by 0.3%, slightly higher than Wall Street’s expectations of a 0.2% increase. This has further complicated the Fed’s decision-making process as it balances inflation control with support for the labor market. According to Michael Pearce, deputy chief U.S. economist at Oxford Economics, the CPI data suggests the Fed is likely to stick with a measured approach. “The unwelcome inflation news will likely lead to a more cautious 25 basis point cut next week,” Pearce said in a client note.
Despite these projections, some analysts are warning that a 50 basis point cut could signal underlying concerns about the U.S. economy. Jennifer Lee, senior economist at BMO Capital Markets, remarked, “A larger cut could send a message of panic and raise fears that the Fed has fallen behind the curve in managing economic risks.”
Historical trends suggest that when the Federal Reserve starts its rate-cutting cycles with a larger reduction, a recession often follows. Nicholas Colas, co-founder of DataTrek Research, pointed out that in both 2001 and 2007, 50 basis point cuts preceded economic downturns. “The Fed is well aware of the risks associated with a larger cut. It is likely to start with a 25 basis point reduction to avoid signaling alarm,” Colas noted. The Federal Reserve will release its latest economic projections and “dot plot” on September 18, which will offer further insights into the central bank’s future rate plans. As of now, markets are expecting a total of 100 basis points in rate cuts by the end of the year, leaving room for further adjustments as the economic landscape evolves.