US Fed Readies First Rate Cut in Four Years Before 2024 Election

By Chetna Gill

Cover Image Attribute: The file photo of Jerome “Jay” Powell is an American investment banker who serves as the 16th Chair of the U.S. Federal Reserve / Source: Getty Images

The United States Federal Reserve (U.S. Fed) is expected to announce its first interest rate reduction in more than four years this week, marking the first since 2020. This comes just months before the U.S. presidential elections in November 2024, according to a report by AFP.
The report further stated that Fed policymakers will discuss the size of the rate cut before making the announcement, which is anticipated on September 18 (U.S. local time). Senior officials, including Fed Chair Jerome Powell, have signaled that a rate cut is likely as U.S. inflation moves closer to the central bank's 2% target and the labor market shows signs of cooling.
The AFP report noted that the Federal Reserve's decision to cut interest rates will be based "solely on economic data," as the central bank operates independently under a U.S. Congressional mandate to ensure stable prices and sustainable employment.
However, a potential rate cut this week could pose challenges for Fed Chair Jerome Powell, coming just two months before the presidential race between Vice President Kamala Harris, the Democratic nominee, and former President Donald Trump, the Republican nominee. The rate cut could influence the economic narrative of the election, potentially affecting voters' perceptions of the current administration's economic policies.
"As much as I think the Fed tries to say that they're not a political animal, we are in a really wild cycle right now," said Alicia Modestino, an economics associate professor at Northeastern University and a former senior economist at the Federal Reserve Bank of Boston, in an interview with AFP.
On September 17-18, policymakers will engage in a crucial discussion on whether to lower interest rates by 25 or 50 basis points (bps), a decision that will significantly impact the U.S. economy.
Either decision would be significant, as this would mark the Fed's first rate cut since March 2020, a move that could have profound implications for the U.S. economy.
The Fed began raising rates in 2022 in response to soaring inflation, driven by a post-pandemic supply shortage and the war in Ukraine. For the past 14 months, it has maintained its key lending rate at a two-decade high of 5.25 to 5.50 percent, waiting for better economic conditions.
Now, with inflation decreasing, the labor market cooling, and continued economic growth, policymakers believe it is the right time for a rate cut. These factors, along with global economic conditions and geopolitical tensions, are key considerations for the Fed's decision.
Policymakers face a decision between making a modest 25 basis point (bps) cut to gradually ease into the rate reduction or opting for a more aggressive 50 bps cut, which could boost the labor market but carries the risk of reigniting inflation. The 25 bps cut would provide a more cautious approach, while the 50 bps cut could provide a more immediate boost to the economy but with potential inflationary consequences.
"I think that in advance of the November meeting, there's not quite enough data to say we're in jeopardy on the employment side," said Alicia Modestino.
Analysts favor the more minor cut as a safer approach. In a recent client report, economists at Bank of America noted, "We expect the Fed to cut by 25 bps."
Modestino further explained, "The Fed likes predictability. It's good for markets, good for consumers, good for workers. So a 25 basis point cut now, followed up by another 25 basis point cut in November after the next round of economic data, offers a somewhat smoother glide path for the economy."
While analysts widely expect the U.S. Federal Reserve to begin cutting rates in September, the outlook beyond that remains shrouded in uncertainty, adding to the anticipation surrounding the Fed's decision.
According to the report, this forecast from the Fed's 19-member rate-setting committee will include their expectations for future rate cuts.
In June, the Federal Open Market Committee (FOMC) reduced their projected rate cuts for this year from a median of three down to just one, following a slight rise in inflation. However, with inflation declining and the labor market weakening, expectations for additional cuts have increased.
Goldman Sachs' chief economist Jan Hatzius wrote in a client note that they anticipate three 25 bps cuts at the remaining 2024 FOMC meetings. Traders also predict a more than 99 percent likelihood of at least four more cuts in 2025, lowering the Fed's key lending rate to 3.5 and 3.75 percent, 175 bps below current levels. 
With reporting by AFP

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