Will the Fed Rates Drop on September 18? How Much Will They Decrease?

Current Trends in Interest Rate Movements

As the direction of the next interest rate movement appears increasingly certain and is largely already priced in by the market, the extent of potential cuts remains uncertain.
This will depend heavily on the data gathered in the coming weeks.

Should the economy continue to show signs of slowing down while inflation remains under control, it would not be surprising to see the Fed opt for a 50 basis points cut to preempt further deterioration of economic conditions.
A glance at several indicators suggests a strong hesitance in this regard, so what can we expect?

The Insights from Powell’s Speech

Jerome Powell’s recent address at the Jackson Hole symposium, one of the most anticipated events in the financial markets, provided crucial insights into the future of U.S.
monetary policy.
Powell communicated clearly, dispelling many uncertainties regarding the direction of interest rates, while still reiterating that decisions would remain strictly “data dependent.”

Current economic data presents a narrative where inflation, although not perfectly aligned with the 2% target, has come significantly closer.
Meanwhile, the labor market, no longer “overheated,” still exhibits strength.
Notably, the unemployment rate has risen to 4.3%, an indicator more reflective of an increase in labor supply than weakness in job demand.

Furthermore, drawing a parallel with pre-COVID-19 conditions, Powell emphasized that the current labor market environment is less rigid than in 2019, when inflation was below 2%.
He believes there are good reasons to anticipate that inflation can return to the targeted 2% while maintaining a robust labor market.

Market Expectations Unveiled

This scenario has led many analysts and investors to believe that a rate cut is imminent.
According to the CME’s Fed Watch Tool, which gauges market expectations on Fed rate movements, the likelihood of a rate cut in the upcoming September meeting is almost certain.
Powell’s remarks have heightened the expectation of a significant rate cut, with two main scenarios emerging.

Fed Watch Tool estimates indicate a 62% chance of a 25 basis points cut, while a more aggressive 50 basis points cut stands at 38%.
This shows that while the market anticipates a rate reduction, it does not dismiss the possibility of the Fed adopting a more decisive stance, especially if forthcoming economic data indicates further cooling of inflation or worsening labor market conditions.

Powell clarified that the pace of cuts will be heavily influenced by incoming economic data, which leaves room for uncertainty.
The Fed seems keen on maintaining flexibility to respond promptly to any shifts in the economic landscape.

Market Reactions

The clear signal that a rate cut is on the horizon has already begun affecting financial markets.
The S&P 500 responded positively to Powell’s comments, gaining ground as expectations for a more accommodative monetary policy rise.

Conversely, the dollar has weakened, reflecting anticipations of looser financial conditions across the United States.