Why The Federal Reserve is Likely to Cut Interest Rates This Week

The results of the presidential election may be up in the air, but investors and economists are confident about another consequential decision this week: the Federal Reserve is widely expected to lower its benchmark interest rate.

Financial markets are betting the policy-making Federal Open Market Committee (FOMC) will make a quarter-point cut to the fed funds rate when it meets Thursday, bringing it to a range of 4.5% to 4.75%, according to the CME Group’s FedWatch tool, which forecasts rate movements based on fed funds futures trading data. In speeches ahead of a “blackout period” beginning Oct. 26, Fed officials indicated that gradual rate cuts over the next few months were in order, and none of the major economic data released since then have been surprising enough to shake up that perception, economists say.

The Fed is in the midst of a rate-cutting campaign that began in September when the central bank lowered the fed funds rate by 50 basis points, or half a percentage point, after holding it at a two-decade high to stifle inflation. The Fed funds rate influences borrowing costs on all kinds of loans: higher rates were meant to discourage borrowing and spending. However, now that inflation has fallen back toward the Fed’s goal of a 2% annual rate, policymakers are lowering rates to boost the economy by encouraging spending.

The rate cuts are meant to prevent the unemployment rate from rising severely. Fed officials had previously indicated they expected to cut the rate by 25 basis points at Thursday’s meeting and again by the same amount in December.

Focus on Fed Statement, Powell’s Remarks

Recent reports on the health of the economy showed inflation continuing to fall while the job market stayed afloat but weakened. Recent jobs data was distorted by the impact of hurricanes Helene and Milton, which temporarily threw people out of work and made it difficult for policymakers to discern the longer-term trajectory of the economy.

Economists said the Fed is likely to stick to its guns in the absence of any signals that inflation is rebounding (which could put a stop to rate cuts) or that employers are accelerating layoffs (which could prompt faster rate cuts.)

Should the Fed’s interest rate move match expectations, the FOMC’s official statement, as well as Fed chair Jerome Powell’s post-announcement press conference, would be the biggest newsmakers, possibly shaping expectations about future rate cuts. Those signals could be murky, however.

“We do not expect significant revisions to the FOMC statement or much guidance about upcoming meetings,” David Mericle, senior U.S. economist at Goldman Sachs, wrote in a commentary.

The Election and the Fed

While the fed is likely to make a 25-basis point cut in November regardless of who wins Tuesday’s election, the Fed’s future moves could be affected by the political climate once the new president is in office.

Former president Donald Trump has proposed wielding more influence over the Fed’s interest rate decisions, possibly pressuring them to push rates lower. On the other hand, economists predict Trump’s economic policies would lead to higher inflation than those of Vice President Kamala Harris, which could pressure the Fed to set rates higher.