The Federal Reserve is poised to implement a significant shift in its monetary policy, anticipated to lower its benchmark lending rate by half a percentage point in the upcoming month. This decision comes in light of growing concerns about a potential recession and increasing volatility within the financial markets, particularly highlighted by a recent commentary from ING, a renowned global financial institution. At the end of last month, the Federal Open Market Committee (FOMC) chose to keep interest rates steady, maintaining the range at 5.25% to 5.50%.
This marked the eighth consecutive pause in rate adjustments. The FOMC's strategy to tighten monetary policy began in March 2022, with the last rate hike occurring in July 2023, as economic agents grappled with rampant inflation. However, Friday’s release of a disappointing jobs report has intensified fears of a recession, prompting a substantial sell-off in the stock market.
The labor market’s unexpected weakness has led ING to revise its expectations regarding interest rates, forecasting a 50-basis-point cut in September, followed by a sequence of additional 25-basis-point reductions. Their analysis suggests that by the summer of the following year, the Fed funds rate could drop to approximately 3.5%. According to ING Research’s Global Head of Macro, Carsten Brzeski, the current market dynamics reflect a roughly 52% likelihood that the Federal Reserve will implement a 50-basis-point cut on September 18.
This figure has seen a notable decrease from a 74% probability merely a week prior, as market participants continuously assess the Federal Reserve's response to economic indicators. Brzeski elaborated on the FOMC's recent policy trajectory, stating, "Our most recent adjustment in outlook was to reduce our projection to just (75 basis points) of cuts in the latter half of the year, which now seems to have been an overly cautious approach.
Instead, we anticipate the Fed yielding to market apprehensions by executing at least one, potentially two (50-basis-point) adjustments to align policy swiftly towards a more neutral stance." In June, Fed officials projected the US economy would grow by 2.1% on an annual basis for the fourth quarter, and they predicted an unemployment rate of around 4% by the close of 2024.
Notably, they indicated that there might be a necessity for perhaps only one rate cut within 2024. At that time, such projections seemed overly optimistic, especially considering that subsequent data from business surveys indicates a softening economic landscape, drastically cooling hiring trends, and inflation trajectory heading towards the Fed’s target of 2%.
Furthermore, unemployment rates are evidently surpassing the earlier forecasts, leading to the justified argument for a more prompt intervention by the Federal Reserve. ING has laid out its expectations for the growth of the US real gross domestic product (GDP), projecting an increase of 2.5% for the current year and a further slowdown to 1.5% in 2025.
The anticipated growth rate for 2026 is pegged at 2.1%. An advance estimate released by the US Bureau of Economic Analysis indicated last month that the real GDP grew by 2.8% in the second quarter, showcasing a significant acceleration compared to the 1.4% growth in the preceding quarter. This underscores the complexities national policymakers face as they navigate economic fluctuations amidst shifting consumer confidence and market conditions..