The Federal Reserve's monetary policy committee is poised to reduce its benchmark lending rate by 25 basis points during its upcoming meeting on Wednesday, despite market expectations for a more substantial cut. This key decision comes against the backdrop of a monetary policy tightening period that saw an increase of 525 basis points from March 2022 to July 2023, all aimed at curbing inflation.
Since then, the Fed has maintained steady interest rates, taking a more cautious approach as economic indicators evolve. The Federal Open Market Committee (FOMC) is scheduled for its next two-day meeting starting Tuesday, with market analysis currently indicating a 41% likelihood of a 25-basis-point rate cut and a 59% chance for a 50-basis-point reduction, according to the CME FedWatch tool.
This marks a notable shift from just a week prior when market expectations showed a higher probability of 70% for a 25-basis-point cut compared to 30% for a more aggressive reduction. In previous remarks, Fed Chair Jerome Powell indicated that the "time has come" to begin easing rates, stressing that the timing and magnitude of such reductions will be contingent on upcoming data trends.
Additionally, New York Fed President John Williams expressed that it is now "appropriate" for the FOMC to initiate rate cuts, and Fed Governor Christopher Waller underscored the importance of starting the easing process later this month. Goldman Sachs has interpreted comments from Fed officials before the blackout period as a strong indication that the FOMC is more inclined to opt for a 25-basis-point cut over a 50-basis-point cut.
A crucial theme anticipated for the upcoming meeting is the focus on risks in the labor market. In a Monday note to clients, Goldman reiterated that while there are no significant downside risks at present, the critical question remains whether labor demand can sufficiently absorb new entrants into the job market to either stabilize or lower the unemployment rate, which has been inching upwards. In its baseline projections, Goldman anticipates three rate reductions of 25 basis points each occurring in September, November, and December.
The firm highlights a slight downward tilt in the risks associated with its forecast, although it also notes that this is less severe than what market pricing suggests. Oppenheimer Asset Management also conveyed in a Monday note that the economy appears to be in a "good enough" state to warrant no more than a 25-basis-point cut, as larger reductions might signal an economy nearing a downturn, according to Chief Investment Strategist John Stoltzfus.
Stoltzfus' analysis points to persistent challenges in achieving the Fed's 2% inflation target but suggests that recent data highlights the importance of timely interventions — alluding to the saying "a stitch in time saves nine." Looking ahead, the FOMC seems likely to evaluate 25-basis-point cuts in both November and December on a contingency basis, dependent on economic conditions.
In the housing market, evidence is emerging of an easing in US mortgage rates, with the daily national average for 30-year fixed loans dipping to 6.62% on Friday, marking the lowest since February 2023. According to Oppenheimer, this decline could serve to unlock the current stagnation in existing home sales across the country. In a report released on Friday, BMO emphasized that the upcoming Summary of Economic Projections will likely reflect a median outlook of three rate cuts throughout the year, with a 25-basis-point reduction expected on Wednesday alone.
The firm anticipates that some participants may even pencil in at least 100 basis points of easing for the year ahead. Looking further out, BMO is forecasting a total of 125 basis points of rate cuts for 2025, highlighting a cautious yet proactive approach toward the complex landscape of inflation and economic recovery..