Key points
- A rate cut by the Federal Reserve on Thursday morning is seen as a near certainty.
- Federal Reserve Chair Jerome Powell said last month that “the time has come” to cut rates.
- US investor Anthony Scaramucci fears a recession could occur in the US if the Fed does not act quickly.
The U.S. Federal Reserve, commonly called 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 led the global market after inflation spiked globally following massive coronavirus-related stimulus spending.
The US benchmark rate of 5.25% to 5.5% has slowed the US economy and brought inflation sharply back towards the Fed’s target of 2%.
A rate cut by the U.S. central bank on Thursday morning is seen as all but certain due to Federal Reserve Chair Jerome Powell’s remarks last month.
Powell said he would not like to see any further cooling in the labor market and that “the time has come” to cut rates.
“The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks,” he said.
According to the US rate forecasting institute CME Fed Watch, the market expects a cut of a quarter of a percentage point (0.25%) or a reduction of half a percentage point (0.50%).
Stephen Miller, a veteran Fed watcher and market strategist at GSFM Funds Management, said Powell made clear that the U.S. central bank intends to lower the cost of borrowing at this week’s meeting.
“Powell’s language was unequivocal, stating that ‘the time has come 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’s the problem.”
Former Donald Trump advisor and US investor Anthony Scaramucci expects a large rate cut and a total of three rate cuts by the end of the year.
In the the man known as “The Mooch” said the Fed waited too long to cut official interest rates.
“I think those of us in finance and on Wall Street think the Fed is behind the curve, so I would like to see a 75 basis point (0.75%) cut from the Fed.
“They’ll probably cut 25 basis points (0.25%), but I think they’ll get to 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 country. US.”
Gemma Dale, investment strategist at National Australia Bank (NAB), said the slowing US labor market could lead the Fed to make a huge cut of 0.5%.
“The market is clearly pricing in cuts, and these have been signaled very explicitly not only by Jerome Powell, but also by other Fed governors, which has given the market a great deal of comfort knowing that we know something is coming.”
“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 believes a large rate cut would send markets into a frenzy.
“The question is whether they will go to 25 (basis) points or 50. I think it will only be 25.”
“The (US) economy is still holding up well. I think the fear of recession is too much. And more importantly, they don’t want to spook the horses.”
Will a rate cut prevent a US recession?
Maybe, maybe not, according to Scaramucci, who runs US hedge fund SkyBridge Capital.
The Mooch is worried that there could be a recession in the United States if the Fed does not act quickly.
“I think there is now a risk of a recession in the United States.
“I think if they cut rates quite dramatically and deeply over the next six months, a recession could be avoided.”
“My judgment is that they (the Fed) have not been behind the curve.”
“Inflation is still above target. It has not yet returned to the 2% level (the Fed’s inflation target).”
“At this point, I think the economy has held up well and they are seizing the times quite well.”
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 policy rates rise from a record low of 0.1% to a 13-year high of 4.35%.
And this has dramatically slowed inflation and the economy.
But RBA governor Michele Bullock says annual inflation – which is currently around 3.8% – is still too high, so interest rates must also remain high to rein in spending.
And the RBA boss says he doesn’t expect any rate cuts for the rest of the year.
“What we can say is that a short-term reduction in the interest rate is not in line with the board’s current thinking,” he told a news conference after last month’s RBA board meeting in which rates were were kept unchanged.
Despite what the RBA boss says, some market watchers such as Stephen Miller think that sooner or later the board’s hand will be forced.
He is predicting a Melbourne Cup Day rate cut on the first Tuesday in November.
NAB’s Gemma Dale has a different mindset.
He doesn’t expect an RBA rate cut until May next year unless the Australian economy starts to crumble.
“The Australian economy is holding up well; it’s not great, we’re in a per capita recession, but it’s not contracting.
“At this point, NAB expects the first cut in May next year, but the risk is always short-term if things really start to collapse.”
And the ASX’s RBA Rate Tracker, published at the end of each trading day, on Monday forecast a rate cut of a quarter of a percentage point in February 2025 and another three ahead of August.
With additional reporting from Reuters.