US Fed almost certain to start cutting interest rates this week

The world’s most powerful central bank will fire the starting gun on interest rate cuts this week, ending the American economy’s two-year battle with high inflation in the run-up to presidential elections in November.
Ratesetters at the US Federal Reserve are almost certain to reduce borrowing costs for the first time in four years on Wednesday, but stock market traders are divided over how far monetary policy will be loosened.
Markets have begun increasing their bets on an outsized reduction of half a percentage point to the Fed Funds rate, with the odds jumping from 15 per cent to 45 per cent on Friday. Most economists expect the Fed to stick with a quarter-point reduction that would take benchmark borrowing costs to a range of 4.75 per cent to 5 per cent.
“The Fed’s open markets committee will almost surely cut rates, with inflation muted and the labour market showing signs of cooling,” Marc Giannoni, chief US economist at Barclays, said.
The Fed’s cut would come on the eve of the September meeting of the Bank of England’s monetary policy committee, which is widely expected to keep the UK base rate on hold at 5 per cent, after it reduced rates in August. Latest inflation figures, to be published this week, are expected to show a slight acceleration in prices growth in Britain, paving the way for no change in interest rates this month.
The American interest rate cut has been widely telegraphed by Jerome Powell, the central bank’s chairman, who has said that the focus of monetary policy has shifted from containing inflation to warding against a significant increase in unemployment and a weak jobs market in the United States. A rate cut on Wednesday would mean that the US joins Britain, the eurozone, Canada and Switzerland in beginning to loosen monetary policy after three years of battling raging prices.
Investors also expect the Fed’s latest set of interest rate projections to give the clearest signal yet about how many rate reductions are to come over the course of the year. Traders are betting on further reductions in November and December, after the conclusion of the presidential election on November 5.
Speculation over the state of the US economy and the size of the Fed’s rate cut has triggered the worst bout of market volatility since the pandemic, as investors shift from extreme bouts of “risk-off” and “risk-on” trading.
Aditya Bhave, US economist at Bank of America, said uncertainty about the true state of the economy would mean that the Fed “will make decisions on a meeting-by-meeting basis, based on the incoming data”. This would mean that “super-sized [interest rate] cuts are on the table at future meetings. Rate cuts are not on a pre-set path.”