Federal Reserve Expected to Keep 50 Basis Point Rate Cut Option on the Table Amid Economic Slowdown
The Federal Reserve is likely to maintain the possibility of a 50 basis point rate cut as a fallback option, as the slowing U.S. economy increasingly calls for more aggressive rate cuts, according to analysts at Capital Economics.
In a note released ahead of the Fed’s September 18 meeting, Capital Economics analysts said, “Our sense is that policymakers are more likely to keep the 50bp option in their back pocket.”
While market expectations for a 50 basis point cut at next week’s Federal Open Market Committee (FOMC) meeting have slightly diminished, there is growing speculation that larger cuts could be on the horizon for subsequent meetings, following recent signals from Federal Reserve officials.
“If the data suggests the need for larger cuts, then I will support that as well,” said Fed Governor Christopher Waller during a speech at the University of Notre Dame on September 6. Waller, who previously advocated for aggressive rate hikes during the inflation surge of 2022, emphasized his willingness to back “front-loading” rate cuts if necessary.
The focus on potential rate cuts has intensified due to mixed-to-weak economic data and recent sharp declines in equity markets, bringing the so-called “Fed put” back into the spotlight. However, analysts caution that the broader economic and financial conditions make it difficult to justify an immediate and forceful response from the Fed, like those seen in previous economic downturns.
Markets are currently pricing in up to 125 basis points of cuts by the end of the year. However, Capital Economics analysts noted that such an aggressive pace of easing would only be warranted by a “significant further deterioration in economic data or financial stability.”
During its July meeting, the Fed signaled one rate cut for this year, but all eyes are now on next week’s FOMC meeting, where the central bank will not only decide on rates but also release an updated summary of economic projections.
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