US Fed policy decision in focus: Did Powell-led FOMC wait too long to cut interest rates? Here’s what experts say

The US Federal Reserve is set to announce its new interest rate decision on Wednesday, September 18, after a two-day Federal Open Market Committee (FOMC) meeting. US Fed chair Jerome Powell-led rate-setting panel is widely expected to reduce the benchmark policy rate for the first time in four years. 

The estimates were cemented after the latest government data revealed that US inflation cooled for the fifth straight month and rose less than expected in August 2024, giving a major boost to Wall Street's bets on the US Federal Reserve's definite interest rate cuts of 25 basis points (bps) next week.

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Headed by Powell, the FOMC will begin deliberations on Tuesday, September 17, for the sixth monetary policy meeting for 2024. Powell has expressed confidence in cutting interest rates for the current meeting, saying that inflation was near the US central bank's two per cent target. 

“The time has come for policy to adjust," Powell said in his keynote speech at the Fed's annual economic conference in Jackson Hole, Wyoming. “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks."

Powell ‘confident’ on rate cut in September

His reference to multiple rate cuts was the only hint that a series of reductions is likely, as economists have forecast. After the worst price spike in four decades inflicted pain on millions of households, Powell emphasised that inflation appears largely under control: “My confidence has grown," he said, “that inflation is on a sustainable path back to two per cent."

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Powell is confident that the central bank will successfully thread the needle and deliver a so-called soft landing for the US economy. It would be a rare feat, last seen in the 1990s. Getting there will require easing off from today’s high interest rates, Powell said, setting up a likely September start to rate cuts.

Powell said the Fed's restrictive monetary policy had "helped restore balance between aggregate supply and demand, easing inflationary pressures and ensuring that inflation expectations remained well anchored." 

Based on Powell's remarks and recent economic data, the US central bank is expected to cut its key rate by a quarter-point or 25 basis points (bps) when it meets next week and carry out additional rate cuts in the coming months.

US inflation data lifts Wall Street 25 bps rate cut bets

Despite the positive round figure, underlying inflation unexpectedly picked up in August due to higher prices for housing and travel, undermining the chances of an outsized US Federal Reserve rate cut in the upcoming policy meeting. Wall Street sharply lowered the probabilities of a broader 50 bps reduction.

The US consumer price index (CPI) slowed to 2.5 per cent in August from a year ago, down from 2.9 per cent in July and the lowest annual figure since February 2021, said the Labor Department's Bureau of Labor Statistics.

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The annual CPI in August was at a three-year or 43-month low, while CPI increased 0.2 per cent in August, dragged down by lower gasoline prices after rising by a similar margin in July. An interest rate cut by the independent US central bank would boost demand in the world's largest economy.

The mixed inflation report from the Labor Department followed data last week showing the labor market still cooling in an orderly fashion in August, defying fears of a sharp deterioration, with the unemployment rate retreating from a near three-year high touched in July.

‘’US inflation picked up in August due to higher prices for housing and travel, undercutting the chances of an outsized Federal Reserve interest rate cut next week. CPI increased 0.2 per cent from the prior month and 2.5 per cent from a year ago in August, marking the fifth straight month the annual measure has eased and been dragged down by lower gasoline prices,'' said Amit Goel, Co-Founder & Chief Global Strategist, Pace 360.

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‘’The data won’t deter the Fed from cutting interest rates next week, it reduces the chance of an outsize reduction. Nevertheless, the main concern for policymakers has been the labour market, which is more likely to drive policy discussions and decisions in the months ahead. They’ll also have more data to consider leading up to their November and December meetings,'' added Goel.

Did the US Fed wait too long to cut rates? Experts opine

In the last policy meeting, Powell-led FOMC unanimously voted to keep the policy rate at the 23-year high of 5.25 per cent—5.50 per cent. The US central bank has maintained borrowing rates steady for 12 straight months to anchor in high inflation and consistently bring it down toward the two per cent target range.

Market analysts said the firmer-than-expected core inflation reading made it more difficult for Jerome Powell to justify a 50 basis point cut in September. The results helped calm market fears of a steeper rate cut as concerns about a hard landing dissipated. Once the Fed begins reducing borrowing costs, the focus will shift to the pace of subsequent easing. 

‘’Overall, inflation appears to have been successfully tamed, but housing inflation still refuses to moderate as quickly as hoped, so it hasn't been completely vanquished. Under those circumstances, we expect the Fed to take a measured approach to cutting interest rates,'' said Raj Patel, CMO at MintCFD, a multi-asset trading platform.

Also Read: US inflation hits 43-month low at 2.5% YoY in August: Wall Street lifts 25 bps Fed rate cut bets; Here’s why

‘’A 25 bps rate cut could show muted market results. However, a major rate cut of 50 bps could generate negative reactions since it might show that the Fed signs major concerns about the economic outbreak. The Fed focuses more on employment as the average US unemployment rate up to July, has increased by 0.5 per cent compared to the lowest point in the past year,'' added Patel.

While some analysts also noted that a quarter-point cut might provide a temporary boost, it is unlikely to have the sustained impact needed to counteract the US economy's multiple challenges. They added that the Fed cannot afford to tiptoe around these warning signs with a cautious 25-point cut

‘’Fed officials have noted that a softening in the labor market could prompt more aggressive rate cuts in the coming months. Yet, a series of weaker-than-expected employment reports has not yet justified rapid cuts. The primary risks for the market in the months ahead include the performance of the broader economy and the jobs sector,'' said Alex Volkov, market analyst at VT Markets.

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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 US Fed has held the rate on hold since July 2023. Two key employment reports are due before the Fed announces the outcome of its November 7 meeting, just days after the US presidential election results. 

‘’There is a slight leaning towards a 50 basis point rate cut for November, with the probability currently at 52.4 per cent. For December, the likelihood of another 50 basis point rate cut increases significantly, with the probability at 80.4 per cent. Given the higher probability, if November sees only a 25 basis point cut, it is likely that a 50 basis point cut will follow in December,'' added Volkov.

Disclaimer: The views and recommendations provided in this analysis are those of individual analysts or broking companies, not Mint. We strongly advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and individual circumstances may vary.