Key Points
- A rate cut by the US Federal Reserve on Thursday morning is considered a virtual certainty.
- Federal Reserve Chairman Jerome Powell said last month that “now is the time” to cut rates.
- American investor Anthony Scaramucci fears a recession in the United States if the Fed does not act quickly.
The US Federal Reserve – commonly referred to as “the Fed” – is widely considered the most powerful central bank in the world. Its interest rate decisions influence the cost of money globally.
The Fed dominated the global market after inflation rose globally following massive coronavirus stimulus spending.
The U.S. benchmark rate of 5.25 to 5.5 percent has slowed the U.S. economy and brought inflation significantly back toward the Fed’s 2 percent target.
A rate cut by the U.S. central bank on Thursday morning is considered a near certainty due to remarks by Federal Reserve Chairman Jerome Powell last month.
Powell said he would not want to see a further cooling of the labor market and that “now is the time” to cut rates.
“The direction forward is clear, and the timing and pace of rate cuts will depend on available data, the evolving outlook and the balance of risks,” he said.
The market expects either a reduction of a quarter of a percentage point (0.25 percent) or a reduction of half a percentage point (0.50 percent), according to the US forecaster. CME Fed Watch rates.
Stephen Miller, a veteran Fed watcher and market strategist at GSFM Funds Management, said Powell made it clear that the U.S. central bank planned to reduce the cost of borrowing at this week’s meeting.
“Powell’s language was unequivocal, saying ‘now is the time for policy to adjust,'” Miller wrote in a recent investment note.
How much will the Fed cut rates?
To quote English poet William Shakespeare’s tragic Prince Hamlet: “That is the question.”
Former Donald Trump advisor and US investor Anthony Scaramucci predicts a sharp rate cut and a total of three rate cuts by the end of the year.
In a the man known as “Mooch” said the Fed waited too long to cut official interest rates.
“I think those of us who work in finance and on Wall Street think the Fed is behind the times, so I would like to see a 75 basis point (0.75%) cut from of the Fed.
“They will probably cut 25 basis points (0.25 percent), but I think you will get at least three cuts this year before the end of the year, which I think will be important for the global economy and for the US.”
Gemma Dale, investment strategist at National Australia Bank (NAB), said the slowdown in the US jobs market could lead the Fed to make a sizeable 0.5 per cent cut.
“The market is very clearly anticipating cuts, and they have been very explicitly signaled not only by Jerome Powell, but by other Fed governors, which has reassured the market that we know something is going to happen. “
“We’ve seen some pretty significant revisions and clearly a massive deterioration in the labor market over the last three months.”
But BetaShares chief economist David Bassanese thinks a significant rate cut would panic markets.
“The question is whether they go up 25 (base) points or 50. I think it will only be 25.”
“The (American) economy is still holding up well. I think the fear of a recession is exaggerated. And above all, they don’t want to spook the horses.”
Will a rate cut prevent a recession in the United States?
Maybe, maybe not, according to Scaramucci, who runs US hedge fund SkyBridge Capital.
The Mooch worries about a recession in the United States if the Fed does not act quickly.
“I think there is now a risk of recession in the United States.
“I think if they cut rates dramatically enough and deep enough over the next six months, we could avoid a recession.”
“My opinion is that they (the Fed) have not lagged behind.”
“Inflation is still above target. It has not yet returned to the 2 percent level (the Fed’s inflation target).”
“At this point, I think the economy has held up well and they’ve got the timing pretty good.”
What does the RBA governor say about Australian interest rates?
The Reserve Bank of Australia (RBA) is also under pressure to cut rates.
Twelve rate hikes since May 2022 have seen official rates rise from an all-time low of 0.1 percent to a 13-year high of 4.35 percent.
And this has significantly slowed inflation and the economy.
But RBA Governor Michele Bullock says annual inflation – currently running around 3.8 per cent – is still too high and so interest rates must also remain high to curb spending .
And the RBA boss says we shouldn’t expect any rate cuts for the rest of the year.
“What we can say is that a short-term reduction in the policy rate does not correspond to the current thinking of the board,” she told a press conference after the meeting of the RBA board meeting last month, during which rates were left unchanged.
Despite what the RBA boss says, some market observers, such as Stephen Miller, believe the board’s hand will be forced sooner rather than later.
He predicts a rate cut on Melbourne Cup Day on the first Tuesday in November.
NAB’s Gemma Dale takes a different view.
She doesn’t expect the RBA to cut rates until May next year – unless Australia’s economy starts to collapse.
“The Australian economy is holding up well; it’s not fantastic, we’re in a per capita recession, but it’s not contracting.
“At present, NAB expects a first reduction in May next year, but the risk is still in the shorter term if things really start to collapse.”
And the ASX’s RBA Rate Tracker – published at the end of each trading day – on Monday forecasts a quarter of a percentage point rate cut in February 2025, and three more before August.
With additional reporting from Reuters.
