Federal Reserve Interest Rate Cuts

Analysts from Citi anticipate that the Federal Reserve will indicate plans for “larger sized” interest rate reductions during Wednesday’s meeting.

The central bank is expected to reduce rates for the first time since March 2020, lowering borrowing costs from a two-decade high range of 5.25% to 5.5%.

However, uncertainty remains regarding the extent of the cuts. The CME Group’s FedWatch Tool suggests there is a 65% chance of a significant 50-basis point cut, as opposed to a standard 25-basis point reduction.

Speculation about a larger reduction has escalated following reports from the Financial Times and Wall Street Journal. Former New York Fed President Bill Dudley believes there is a strong case for deeper cuts, noting current borrowing costs exceed the neutral rate that balances economic activity.

Before the announcement, U.S. retail sales unexpectedly increased in August, signaling consumer resilience. This, coupled with mixed inflation figures and easing labor demand, adds complexity for Fed officials.

The Fed’s announcement will also present updated rate projections, an official statement, and a press conference with Chair Jerome Powell.

Traders are expected to seek insights about the Fed’s potential easing strategy, with market predictions suggesting at least 100 basis points in cuts by the end of 2024.

Citi analysts emphasized that regardless of the cut size, a dovish meeting is anticipated, with Powell indicating future substantial cuts. However, despite stronger-than-expected retail sales, some details indicate signs of an economic slowdown, particularly in restaurant spending.