US Federal Reserve ‘must go big with 50 bps interest rate cut in September’ or risk recession: Experts

The US Federal Reserve announced its interest rate decision in the previous Federal Open Market Committee (FOMC) meeting, leaving the benchmark interest rates unchanged at 5.25 per cent - 5.50 per cent for the eighth straight meeting, in line with Wall Street estimates.

Fed chair Jerome Powell-led rate-setting panel ended its fifth policy-setting meeting for 2024 on July 31 and unanimously voted to keep the policy rate at the 23-year high. The US central bank has maintained borrowing rates steady for 12 straight months to bring down inflation in the world's largest economy.

Also Read: US Fed holds key rates elevated at two-decade high, Powell nods to possible September cut; 5 major takeaways

Powell has set the stage for the central bank's first rate cut in four years, citing greater progress toward lower inflation and a cooler job market that no longer threatens to overheat the economy. Powell said if US inflation continues to fall, “a reduction in our policy rate could be on the table" when the Fed next meets in September.

"The broad sense of the committee is that the economy is moving closer to the point at which it will be appropriate to reduce our policy rate," he said, adding that there had been a "really significant decline in inflation, but we’re not quite at that point." In its policy statement, the Fed mentioned that US inflation has eased over the past year but ‘’remains somewhat elevated''.

Wall Street experts bet big for September rate cut

Wall Street has priced in a September rate cut, with experts placing bullish bets over the policy action. According to Nigel Green, CEO of deVere Group, the US Federal Reserve must go big with a supersized 50 basis point interest rate cut in September to get ahead of a looming economic storm, warns the CEO of deVere Group.

The warning from Green comes as consumer prices in the US inched up modestly last month, fueling widespread expectations that the Fed will begin easing its grip on interest rates. The latest figures from the Bureau of Labor Statistics showed a modest 0.2 per cent rise in the consumer price index for July, including a ‘core’ measure that strips out volatile food and energy prices.

However, with the US economy standing at a precipice with consumer confidence showing signs of weakness, spending slowing, and concerns over corporate earnings, many argue that a cautious approach won’t cut it.

“Here’s the hard truth: the Fed was behind the curve when this cycle began, and it cannot afford to make the same mistake twice. With rates currently sitting at a more than two-decade high, there’s no room for hesitation. A 25 basis point cut might signal a shift, but it’s not the aggressive action needed to stave off a potentially devastating hard landing,'' said Nigel Green.

Also Read: RBI vs US Fed: Which central bank will cut interest rates first? Here’s a 5-point analysis

What if Fed pauses again? - Experts raise recession fears

The US Fed maintained that its interest rate decisions remain data-dependent. In its statement, officials said the Fed is “attentive to the risks to both sides of its dual mandate” — price stability and full employment — adding that the central bank doesn’t expect to cut rates “until it has gained greater confidence that inflation is moving sustainably toward two per cent.”

After raising the policy rate by 5.25 percentage points since March 2022 in one of the swiftest Fed reactions to combat the worst outbreak of inflation in 40 years, the central bank has held the rate on hold since July 2023 to anchor in high inflation and consistently bring it down toward the two per cent target range.

‘’The US market moved up in anticipation of this and a rate cut by the Fed in September. If the rate cut is 50 bps, the US market will remain resilient, supporting global markets. This is the likely scenario. On the other hand, if the Fed disappoints with no rate cut, the market will sell off, which will have repercussions globally,'' said Dr. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

Also Read: US Q2 GDP: At 2.8%, US economy beats estimates on robust consumer spending; Wall Street lifts Fed rate cut bets

The Fed’s rate hikes have helped lower annual inflation from a peak of 9.1 per cent in June 2022 to three per cent. However, high rates have made borrowing costlier for businesses and households. Policymakers must keep rates high enough to slow spending and defeat high inflation without derailing the economy.

The longer the Fed keeps borrowing costs high, the more it risks weakening the economy too much and causing a recession. Yet, if it cuts rates too soon, it risks reigniting inflation, which is still volatile due to geopolitical conflicts and uncertain outlook.

“If the central bank doesn’t move decisively, we could be looking at a prolonged period of stagnation, or worse, a full-blown recession. The stakes couldn’t be higher. The Fed needs to stop playing catch-up and start leading the charge,'' said Green

“Anything less than a 50 basis point cut in September would be a missed opportunity - one that the economy and Americans can’t afford. It’s time for the Fed to act boldly, to cut rates aggressively, and to send a clear message that it’s ready to do whatever it takes to keep the US economy on track,'' he added.

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