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https://www.reuters.com/markets/rates-bonds/with-feds-rate-cut-hand-debate-swirls-over-how-big-move-2024-09-18/
The Federal Reserve raised eyebrows Wednesday with a bigger-than-expected cut in a key interest rate, a move that could fuel speculation about the trajectory of the U.S. economy headed into the November presidential election.
The central bank decreased the rate at which banks lend to each other overnight from a range of 5.5% to 5.25% by a half-percentage point to 5% to 4.75%. Many Wall Street economists had been expecting a smaller quarter-point cut as the start of a small cycle of similar cuts in the coming months.
In a post-meeting statement, the Fed panel that decides monetary policy said the risks of inflation reigniting and unemployment growing were “roughly in balance.”
The size of the cut was not a total surprise to Wall Street. Bond traders had been looking to a half-point reduction last week before expectations fell back again closer to a quarter-point cut, according to Reuters.
The cut puts an emphatic end to the Fed’s fight against inflation, which led it to raise rates from near zero to above 5% in 2022 and 2023, sparking fears of a recession. But the economy defied expectations in 2023 by continuing to grow robustly.
The Fed’s action Wednesday, though, may be seen as either trying to show it is as willing to pump up the economy as it was to slow it when inflation was high or that the economy is closer to stalling out than widely believed.
Fear financial markets would see a half-point cut as signaling worries about the economy was why a smaller decrease had been expected.
“It’s possible that a large rate cut could cause equity markets to fall and credit spreads to widen which, all other things being equal, would tighten financial conditions. This would evidently be self-defeating,” wrote Neil Shearing, group chief economist with London-based analysis firm Capital Economics on Monday.
The Federal Reserve raised eyebrows Wednesday with a bigger-than-expected cut in a key interest rate, a move that could fuel speculation about the trajectory of the U.S. economy headed into the November presidential election.
The central bank decreased the rate at which banks lend to each other overnight from a range of 5.5% to 5.25% by a half-percentage point to 5% to 4.75%. Many Wall Street economists had been expecting a smaller quarter-point cut as the start of a small cycle of similar cuts in the coming months.
In a post-meeting statement, the Fed panel that decides monetary policy said the risks of inflation reigniting and unemployment growing were “roughly in balance.”
The size of the cut was not a total surprise to Wall Street. Bond traders had been looking to a half-point reduction last week before expectations fell back again closer to a quarter-point cut, according to Reuters.
The cut puts an emphatic end to the Fed’s fight against inflation, which led it to raise rates from near zero to above 5% in 2022 and 2023, sparking fears of a recession. But the economy defied expectations in 2023 by continuing to grow robustly.
The Fed’s action Wednesday, though, may be seen as either trying to show it is as willing to pump up the economy as it was to slow it when inflation was high or that the economy is closer to stalling out than widely believed.
Fear financial markets would see a half-point cut as signaling worries about the economy was why a smaller decrease had been expected.
“It’s possible that a large rate cut could cause equity markets to fall and credit spreads to widen which, all other things being equal, would tighten financial conditions. This would evidently be self-defeating,” wrote Neil Shearing, group chief economist with London-based analysis firm Capital Economics on Monday.
