(AFP) – The US Federal Reserve began a two-day interest rate discussion on Tuesday that is all-but-certain to end with its first cut since March 2020, as inflation continues to ease. The meeting began at 10:30am in Washington (1430 GMT), the US central bank announced in a statement. The Fed’s rate decision will be announced on Wednesday afternoon local time.
Policymakers are widely expected to debate whether to choose a small cut of a quarter of a percentage point or to make an aggressive half-point reduction to the Fed’s benchmark lending rate. The Fed goes into the meeting in an enviable position, with US inflation easing towards its long-term target of two percent, and a resilient-yet-cooling labor market. Economic growth also remains positive, despite the squeeze in borrowing costs for consumers and businesses because of the Fed’s decision to hold its key lending rate at a two-decade high since July last year.
The data raises hopes that the Fed can achieve the rare feat of bringing inflation back down to target without triggering a recession — known as a “soft landing.” A rate cut of any size would support US consumers, who are feeling the effect of interest rates at a 23-year high of between 5.25 and 5.50 percent, impacting the cost of borrowing on everything from mortgages to car loans.
While a larger cut would do more to push down the cost of borrowing, it also runs the risk of reigniting inflation — and Fed policymakers are unlikely to support it, according to KPMG chief economist Diane Swonk. “A larger, one-half percent cut will no doubt be discussed during the meeting, but Fed Chairman Jay Powell is unlikely to have the votes to get a half percent cut in September over the finish line,” she wrote in a recent note to clients.
“Either way, we still expect to see a full one percent of cuts prior to year-end, which means at least one outsized cut in September, November or December,” she added. The futures markets price in a probability of around 65 percent that the Fed will announce a half point cut on Wednesday, according to data from CME Group.
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