The Federal Reserve has maintained interest rates at a 23-year high since last July, but Wall Street is now shifting from “if” to “when” regarding an upcoming rate cut.
This Wednesday, the Fed will announce its latest decision after months of data suggest conditions are ripe for a rate cut: cooling inflation and slowing job gains.
However, economists predict the Fed will hold rates steady this week to ensure these trends are solid before the next meeting in September.
According to the CME FedWatch Tool, which gauges market sentiment, there’s more than an 85% chance of a rate cut in September, while the odds for a cut this Wednesday are a mere 5%.
The economy seems to be racing toward rate cuts later this year, which would bring long-awaited relief to households and businesses burdened with high-interest debt. Price increases have significantly slowed from their peak of over 9%, though inflation still sits a percentage point above the Fed’s 2% target. June saw an outright drop in prices from the previous month, signaling progress in controlling inflation.
The labor market, though still growing, has cooled down. Unemployment has inched up from 3.7% to 4.1% this year.
Guided by its dual mandate to control inflation and maintain a strong labor market, the Fed has recently given more weight to employment concerns. Fed Chair Jerome Powell noted last month, “For a long time since inflation arrived, it’s been right to mainly focus on inflation. But now that inflation has come down and the labor market has indeed cooled off, we’re going to be looking at both mandates. They’re in much better balance.”
Powell added that unexpected weakening in the labor market might prompt a reaction from the Fed.
Last week’s robust economic data could complicate the path to a rate cut. The U.S. economy grew faster than expected in the second quarter, accelerating from the previous quarter, according to the U.S. Bureau of Economic Analysis. This unexpected growth could rekindle inflation if the Fed cuts rates too soon.
After the strong economic data release, the odds of a September rate cut dipped to about 80% but quickly rebounded, rising seven percentage points since then.
As the Fed balances its dual mandate and navigates through economic signals, the upcoming months will be crucial in determining the timing and impact of potential rate cuts.
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