What the Federal Reserve is likely to do after stock selloff
Renewed concerns about the U.S. economy could have a major impact on Americans that go well beyond this week's free fall in stocks.
Experts say the recent slide in financial markets, triggered by mounting evidence that the economy is bogging down, raises the odds that the Federal Reserve will aggressively ease monetary policy starting next month in a bid to avert a severe downturn. Wall Street analysts now forecast a series of interest rate cuts starting in September, and continuing into 2025.
Prior to the rout, economists polled by financial data firm FactSet had penciled in a rate cut at the Fed's September 18 meeting, predicting the central bank would trim borrowing costs by just 0.25 percentage points. But that conviction has shifted, and economists overwhelmingly predict that the Fed will trim rates by double the prior forecast, or 0.5 percentage points, FactSet data shows.
Wall Street forecasters also think the Fed will further trim borrowing costs at its November and December meetings, with the majority predicting the benchmark rate could be as low as 4% to 4.25% by year-end, or about 1.25 percentage points lower than its current 23-year high.
Larger rate cuts would provide welcome relief to borrowers, including home and car buyers who have been priced out of the market due to high financing costs. The downside would be felt by savers, given that high-interest rate savings accounts and CDs would likely offer less favorable terms following Fed cuts.
Typically, the Fed lowers rates in 0.25 percentage-point increments (or what Wall Street calls 25 basis points, which are equal to 1/100th of a percentage point), but the Fed has occasionally made cuts that were double or even quadruple that size. For instance, the Fed cut rates by 0.5 and 1 percentage points in March 2020 during two emergency meetings as the pandemic was crippling the economy.
"The market is demanding a lot of rate cuts — and aggressive rate cuts," Amanda Agati, chief investment officer of PNC Financial Services Group's asset management unit, told CBS MoneyWatch. "It's very possible a 50 basis point rate cut is what happens in September, versus the traditional 25."
Will the Fed have an emergency meeting?
As markets plunged on Monday, some analysts and investors questioned whether the Fed could choose enact an emergency rate cut before its September meeting.
The pressure from some quarters to act swiftly in easing rates comes in wake of the Fed's July 31 meeting, when the central bank decided to keep its benchmark rate steady. At a press conference that day, Fed Chair Jerome Powell acknowledged that the highest interest rates in decades posed growing risks to the labor market, but said he and other officials wanted to see more evidence that inflation was cooling before cutting rates.
But the August 2 jobs report was much weaker than expected, sparking fears the Fed has been tardy in lowering rates and spurring some investors to call for for an emergency cut.
That's highly unlikely, many economists say. The Fed typically reserves emergency action for when it perceives broader risks to the financial system or to the economy, such as the pandemic. The July labor data that sparked fears of a recession also only captures a single month of hiring, while experts note that job growth, while slowing, isn't collapsing.
"[C]urrent economic data do not warrant an emergency intermeeting rate cut, and this would only ignite a new round of panic into the markets," Nationwide chief economist Kathy Bostjancic noted in an email.
Will interest rates fall in 2024?
Wall Street is betting on significant rate reductions throughout the remainder of 2024, although Powell last month hedged about the chances of a September cut. The Fed's benchmark rate has sat at 5.25% to 5.5% since July 2023, which marked the last time the central bank hiked rates. The Fed hasn't lowered rates since March 2020.
The time for a rate cut "is approaching, and if we do get the data we hope we get, then reduction of our policy rate could be on the table at our September meeting," Powell told reporters on July 31.
But those remarks were made before Friday's weak jobs report, which has sent economists back to the drawing table. Here's how much experts think the Fed is likely to cut rates over its final three meetings of the year, according to FactSet:
- September 18 meeting: A cut of 0.5 percentage points, bringing the federal funds rate to 4.75% to 5%, according to all economists surveyed by FactSet.
- November 7 meeting: Almost 6 in 10 economists are penciling in another 0.5 percentage point cut, which would lower the benchmark rate to 4.25% to 4.5%. About 4 in 10 predict a 0.25 percentage point cut.
- December 18 meeting: More than half of economists forecast another quarter-point cut, which would bring the federal funds rate to between 4% and 4.25%. But some analysts expect even deeper cuts, with almost 20% forecasting the benchmark rate could be as low as 3.75% to 4% by year-end.
"With rates at a 23-year high, the Fed has plenty of flexibility to support the economy and markets," noted Solita Marcelli, Chief Investment Officer Americas at UBS Global Wealth Management, in a report. She forecasts that rates by year-end will be 1 percentage point lower, or in a range of 4.25% to 4.5%.
Solita added, "Given recent evidence that inflation is moving sustainably back to the Fed's target, we think the central bank has an incentive and justification to move more swiftly than previously expected to bring rates lower."