Why the Federal Reserve is likely to cut rates this week

The outcome of the presidential election may still be up in the air, but investors and economists are confident about another decision that will have consequences this week: the Federal Reserve is widely expected to cut interest rates.

The financial markets rely on policymaking Federal Open Market Committee (FOMC) will cut the fed funds rate by a quarter point at Thursday’s meeting, bringing it to a range of 4.5% to 4.75%, it said CME Group’s FedWatch toolwhich predicts interest rate movements based on Fed Funds futures trading data. In speeches ahead of a “blackout period” starting Oct. 26, Fed officials indicated as much gradual interest rate cuts The coming months were fine, and none of the key economic data released since was surprising enough to change that perception, economists say.

The Fed is in the midst of a rate-cutting campaign that began in September when the central bank cut rates cut the Fed Funds rate by 50 basis pointsor half a percentage point, after being kept at a 20-year high to suppress inflation. The fed funds rate affects the borrowing costs for all kinds of loans: higher interest rates were intended to discourage borrowing and spending. However, as inflation has retreated toward the Fed’s target of 2% annualized, policymakers are lowering interest rates to stimulate the economy by encouraging spending.

The interest rate cuts are intended to prevent a serious rise in unemployment. Fed officials had previously indicated they expected to cut rates by 25 basis points at Thursday’s meeting and again by the same amount in December.

Focus on the Fed statement and Powell’s comments

Recent reports on the health of the economy showed inflation keeps falling while the labor market stayed afloat, but weakened. Recent jobs data was distorted by the impact of Hurricanes Helene and Milton, which left people temporarily unemployed and made it difficult for policymakers to discern the longer-term trajectory of the economy.

In the absence of signals, economists expect the Fed to signal that inflation is recovering (which could put an end to rate cuts) or that employers are accelerating layoffs (which could lead to faster rate cuts).

Should the Fed’s rate move match expectations, the FOMC’s official statement and the press conference following Fed Chairman Jerome Powell’s announcement would be the biggest newsmakers, potentially influencing expectations for future rate cuts. However, those signals can be obscure.

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

The elections and the Fed

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

Former President Donald Trump has proposed exert more influence about the Fed’s interest rate decisions, potentially putting pressure on it to cut rates. On the other hand, economists predict that Trump’s economic policies would lead to an economic crisis higher inflation than that of Vice President Kamala Harris, which could put pressure on the Fed to set interest rates higher.