US Fed meeting today: Here are 5 factors that will impact US central bank’s rate decision

The US Federal Reserve is scheduled to announce its monetary policy decision at 11:30 PM (India time) today, September 18. The market is expecting a 25-basis-point cut in the key interest rate, marking the first reduction in four years. As a rate cut is largely anticipated, the main discussion revolves around whether the cut will be 25 bps or 50 bps.

The market is keenly anticipating US Fed Chair Jerome Powell’s remarks on inflation and employment for insights into the economy's health and potential future rate cuts. Powell’s speech is expected to be a key policy event influencing sentiment in both domestic and global stock markets, which are seeking his direction on the start of the easing cycle.

“In the September meeting, the Federal Reserve will likely cut interest rates for the first time since 2020. The Fed’s policy-making Federal Open Market Committee (FOMC) has not changed interest rates since July 2023. The market's primary question is how far and fast the Fed will cut rates. We foresee a 25 basis point (bps) rate cut,” said Amit Goel, Co-Founder and Chief Global Strategist at Pace 360.

However, there are several factors that will influence the magnitude of the decision behind rate cut.

Here are five possible factors that will impact US central bank's rate decision -

US Inflation

Although the headline figure was positive, underlying inflation unexpectedly rose in August due to increased housing and travel costs, reducing the likelihood of a significant rate cut by the US Federal Reserve at the upcoming policy meeting.

The U.S. Consumer Price Index (CPI) slowed to 2.5% in August compared to the same month last year, a decline from 2.9% in July, marking the lowest annual rate since February 2021, according to the Bureau of Labor Statistics of the Labor Department.

Unemployment rate

In August, the US unemployment rate dropped to 4.2%, slightly down from 4.3% in July. However, it remains significantly higher than the historic low of 3.4% recorded in April 2023. Although the US Federal Reserve has managed to bring inflation closer to its 2% target, the increasing unemployment rate remains a cause for concern.

Manufacturing Sector

The U.S. manufacturing sector shrank for the 11th time in the past 12 months, indicating a decline in overall production and demand. The ISM Manufacturing PMI registered 47.2 in August.

In August, production at U.S. factories saw a significant increase due to a rebound in motor vehicle output. However, the data for the previous month was revised downward, indicating that manufacturing had largely stagnated. According to the Federal Reserve, factory output rose by 0.9% in August, following a revised 0.7% decline in July.

Jobs Openings

The job openings data is closely linked to the unemployment rate. An increase in job openings indicates economic expansion, while a decline suggests a cooling labor market. The latest data reveals that job openings in July dropped to their lowest level since January 2021, during the peak of the COVID-19 pandemic. With the US economy adding only 142,000 jobs in August—well below expectations—economists now believe that the chance of a 50-basis point rate cut has risen.

Inverted Yield-Curve

The yield curve, which reflects the difference between the 10-year yield and the 2-year yield, has emerged as the most significant indicator of a recession in the US.

According to CNBC TV18 report, the yield curve 'un-inverted', which is typically positive for the economy under normal conditions. However, since the yield curve had been inverted for two years while the economy stayed resilient, many fear that the US might experience a recession similar to those of 2001 or 2007, when the yield curve 'un-inverted'. This increased risk of recession could lead the Fed to implement more substantial and frequent rate cuts in the coming months.