Monetary policy|The U.S. Federal Reserve must carefully consider whether it will resort to a slightly more restrained rate cut or a slightly fairer rate cut.
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The US Federal Reserve will make its monetary policy decision next Wednesday.
The market now expects a rate cut of 0.25 percentage points instead of 0.50 percentage points.
A drop of half a percentage point could strengthen the labor market and slow down economic growth.
There is a risk that the market will start pricing in ever lower interest rates if the Fed cuts the key rate by 0.50 percentage points.
Expectations The US Federal Reserve’s interest rate cut seems to be fading a bit. The Federal Reserve will make its next monetary policy decision next Wednesday.
The market is currently pricing in a 0.25 percentage point rate cut from the Fed instead of a 0.50 percentage point rate cut.
Economic magazine The Financial Times (FT) describes the U.S. central bank as facing a tough decision as to whether it will resort to a slightly more restrained or slightly fairer interest rate cut.
FT’s according to this, borrowing costs would return to a normal level faster if the Fed ended up with a half-percentage-point interest rate cut. This could both put a brake on the burgeoning slowdown in economic growth and strengthen the US labor market.
There has been a fear in the air in recent weeks that the US economy would be slowing down. Although the employment data released a week ago showed that the labor market is still strong, the number of new employees remained economists’ expectations.
The management of the Fed has basically taken a positive view of interest rate cuts. Inflation slowed down in August in the United States to 2.5 percent, which was slightly more than economists’ expectations.
On the other hand, core inflation, closely monitored by the central bank and economists, was 3.2 percent, i.e. the same as in July.
Core inflation is an important measure because the direct impact of sensitively changing energy and food on consumer prices has been removed from it. Therefore, it better describes the broad scope of inflation.
Fed has kept the key interest rate unchanged in the range of 5.25–5.50 percent since September of last year. It would be the first interest rate cut in more than four years if the central bank decides to cut its key interest rate next Wednesday.
The interest rate cut would then take place seven weeks before the US presidential election in November.
According to the FT, it doesn’t matter whether the Fed cuts its key rate by 0.25 percentage points or 0.50 percentage points. A fairer interest rate cut could be interpreted as a sign that the central bank is worried about the state of the economy.
This, in turn, could lead to the market aggressively pricing ever lower interest rates. In that case, the easing pace of monetary policy would no longer proceed according to the Fed’s plans.
Thus, the central bank must carefully weigh what kind of message it wants to convey with its possible interest rate cut next Wednesday.
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