Fed Expected to Cut Interest Rates Soon, But Not This Week

The Federal Reserve has held interest rates at their highest level in 23 years since last July, but a rate cut is widely expected in the coming months. On Wall Street, the outlook for an interest rate cut has shifted from a question of if to a question of when.

The central bank will release its latest interest rate decision on Wednesday, after a months-long string of data established the key conditions for a rate cut: slowing inflation and slowing job creation.

Economists still expect the Fed to leave interest rates unchanged on Wednesday, giving it time to ensure current trends hold before its next meeting in September.

Chances of interest rate cut at Fed meeting in September are over 85%, US news agency says CME FedWatch Toola measure of market sentiment. The same tool shows that the probability of a rate cut on Wednesday is just 5%.

The economy, however, appears headed toward an interest rate cut later this year. Such an outcome would provide much-needed debt relief to households and businesses saddled with costly debt.

Price growth has slowed significantly from a peak of more than 9%, even though inflation remains a full percentage point above the Fed’s 2% target rate. The fall in prices in June from the previous month marked a major sign of progress in slowing inflation.

The labor market has continued to grow, but its rapid pace has slowed. The unemployment rate has increased this year, from 3.7% to 4.1%.

The Fed is guided by a dual mandate: keeping inflation in check and keeping the labor market elevated. The months of good news on inflation and bad news on unemployment have prompted the Fed to pay close attention to its goal of keeping Americans working, Fed Chairman Jerome Powell said last month.

“For a long time, since inflation came along, it made sense to focus primarily on inflation. But now that inflation has come down and the labor market has actually cooled, we’re going to look at both mandates. They’re much better balanced,” Powell said at a meeting of the Economic Club of Washington, D.C.

“That means that if we were to see an unexpected weakening in the labor market, that could also be a reason for us to react,” Powell added.

However, strong economic data released last week could complicate the path to a rate cut.

The U.S. economy grew much faster than expected in the three months through June, accelerating from the previous quarter and defying concerns about a possible slowdown, data showed. United States Bureau of Economic Analysis.

If the Fed cuts interest rates as the economy warms, the central bank risks triggering another rapid rise in prices.

After the economic data was released last Thursday, the probability of a rate cut in September fell to around 80%. This drop in sentiment, however, proved temporary. The probability has increased by seven percentage points since then.