The Likelihood of a Fed Interest Rate Cut in September

Renewed concerns about the U.S. economy could have significant consequences for Americans as stocks continue to plunge. Experts are pointing to growing evidence of economic trouble as the cause for the recent slide in financial markets. This has raised the possibility of the Federal Reserve implementing significant monetary policy easing as early as next month to avoid a severe recession. Wall Street analysts are now predicting a series of rate cuts beginning in September and extending into 2025.

The Expectation of Rate Cuts

Prior to the stock market downturn, economists polled by financial data firm FactSet anticipated a modest 0.25 percentage point interest rate cut by the Fed at its September 18 meeting. However, current beliefs have shifted, with the majority of economists now predicting a larger 0.5 percentage point cut. Wall Street forecasts indicate further rate reductions at the November and December meetings, possibly bringing the benchmark interest rate to as low as 4% to 4.25% by the end of the year.

A deeper rate cut would provide relief to borrowers, including those looking to purchase homes or cars, who have been facing challenges due to high financing costs. On the flip side, savers are likely to see diminishing returns on high-interest savings accounts and certificates of deposit following the Fed’s rate cuts.

Potential for Emergency Action

As markets plummeted, some analysts and investors raised the question of whether the Fed might implement emergency interest rate cuts even before the scheduled September meeting. Calls for immediate rate reductions surfaced after the Federal Reserve’s July 31 meeting where it opted to keep benchmark interest rates stable. Fed Chairman Powell, while acknowledging risks to the labor market posed by high interest rates, indicated a wait-and-see approach before any rate adjustments based on evolving data.

However, a weaker-than-expected jobs report on August 2nd led to speculation about the possibility of an emergency rate cut. Despite these concerns, many economists argue that such drastic action is unwarranted at this time and could create additional market panic.

Forecast for Interest Rates in 2024

While Powell hinted at a potential rate cut in September, Wall Street is betting on significant rate reductions throughout the remainder of 2024. The Federal Reserve has maintained its benchmark interest rate at 5.25% to 5.5% since July 2023, with the last rate hike occurring in March 2020. Based on predictions, interest rates may see the following changes:

• September 18 meeting: All economists surveyed anticipate a 0.5 percentage point cut to a range of 4.75% to 5%.
• November 7 meeting: Nearly 60% of economists expect another 0.5 percentage point cut, bringing the rate to 4.25% to 4.5%.
• December 18 meeting: More than half of economists predict a further 0.25 percentage point cut to a range of 4% to 4.25%, with some analysts suggesting a lower rate.

Analysts like Solita Marcelli from CUBS Global Wealth Management Americas predict a 1 percentage point decrease by the year-end, leading to a range of 4.25% to 4.5%. The rationale behind these forecasts lies in the Fed’s flexibility to support the economy and markets amidst rising inflation pressures.