A Rate Cut is Most Likely Coming in September

[bjl584]

Fed minutes: Most officials favored a rate cut in September if inflation continued to cool (yahoo.com)

[james.hendrickson]

Posting the full text for everyone who doesn't want to click.


Fed minutes: Most officials favored a rate cut in September if inflation continued to cool


CHRISTOPHER RUGABER
Wed, Aug 21, 2024, 11:17 AM PDT3 min read


WASHINGTON (AP) — Most Federal Reserve officials agreed last month that they would likely cut their benchmark interest rate at their next meeting in September as long as inflation continued to cool.

The minutes of the Fed’s July 30-31 meeting, released Wednesday, said the “vast majority" of policymakers “observed that, if the data continued to come in about as expected, it would likely be appropriate to ease policy at the next meeting.”

In July, the policymakers kept their benchmark rate at 5.3%, a near-quarter-century high, where it's stood for more than a year.

Wall Street traders had already considered it a certainty that the Fed will announce its first interest rate cut in four years when it meets in mid-September, according to futures prices. A lower Fed benchmark rate would lead eventually to lower rates for auto loans, mortgages and other forms of consumer borrowing and could also boost stock prices.

The minutes of the Fed’s meetings sometimes reveal key details behind the policymakers’ thinking, especially about how their views on interest rates might be evolving. Further guidance on the Fed’s next steps is expected when Chair Jerome Powell gives a highly anticipated speech Friday morning at the annual symposium of central bankers in Jackson Hole, Wyoming.

A rate cut in September, coming less than two months before the presidential election, could bring some unwelcome political heat on the Fed, which seeks to avoid becoming entangled in election-year politics. Former President Donald Trump has argued that the Fed shouldn’t cut rates so close to an election. But Powell has repeatedly underscored that the central bank would make its rate decisions based purely on economic data, without regard to the political calendar.

Several Democratic senators, led by Elizabeth Warren of Massachusetts, had urged Powell to cut rates at the Fed's July meeting and have argued that delaying a cut when it's warranted by the inflation data would itself be a political act.

Inflation, according to the Fed’s preferred measure, has tumbled from a peak of 7.1% in 2022 to just 2.5% now. In recent interviews with The Associated Press, two Fed officials noted that as inflation slows, inflation-adjusted interest rates — which businesses closely track — rise. That trend supports a rate cut in the near term, according to both Raphael Bostic, president of the Fed's Atlanta branch and Austan Goolsbee, president of the Chicago branch.

“We might need to shift our policy stance sooner than I would have thought before," Bostic said.

[disneysteve]

I think this has been anticipated for a while now. Inflation is well under control so it's time. The economy is already in great shape and a rate cut just makes it even better. Lowering the cost of borrowing helps those shopping for a home, a car, or carrying other consumer debt. Mortgage rates have been trending downward for several months without a rate cut so a cut will just accelerate the decline and help buyers even more. Lower rates help businesses also as they're able to borrow at a lower cost to grow their operations.

It's not so great for savers, but there's already a disconnect because my money market is still paying 5.27% while inflation is under 3%. That's not a sustainable situation. It's very abnormal for a plain old savings account to be outperforming the inflation rate by well over 2%.

As our bonds and CDs mature, I'm locking in what I can for for as long as I can. I'm sacrificing the 5.27% in the short term but I know that rate won't last much longer and it certainly will be a lot lower a year or two from now. I'd rather lock in the lower rate for a fixed period. We've got bonds and CDs paying as much as 5.08% for as long as April 2029 right now. That rate is going to look really sweet a couple of years from now.

[kork13]

Agreed, this is long-expected, and strongly signaled by the Fed. Savings & bond rates will indeed start to drop, but at least for those invested in stocks, The stock market typically gets buoyed by lower lending rates (less costly for them to get debt capital for business investments). Although, some of that effect is likely already baked into current prices, given how long this move has been expected & choreographed.

[srblanco7]

Agreed, this is long-expected, and strongly signaled by the Fed. Savings & bond rates will indeed start to drop, but at least for those invested in stocks, The stock market typically gets buoyed by lower lending rates (less costly for them to get debt capital for business investments). Although, some of that effect is likely already baked into current prices, given how long this move has been expected & choreographed.

Agree that the first cut is largely "baked in". Will be interested to see how big it is (0.25% vs 0.5%) and the subsequent pace of rate cuts (presuming the Fed continues to cut to some newly established target).

As lending costs decrease, I wonder if we'll see a pick up in small cap (and maybe mid cap) equities as borrowing costs, in general, weigh more heavily on their performance than large caps.

[ua_guy]

I'm here for it. Should keep the mania of the local housing market going.

[disneysteve]

Agree that the first cut is largely "baked in". Will be interested to see how big it is (0.25% vs 0.5%) and the subsequent pace of rate cuts (presuming the Fed continues to cut to some newly established target).

I’d be very surprised if it’s more the. 0.25%.