The United States Federal Reserve is expected to lower interest rates in response to slowing inflation and cooling the labour market. Will the Federal Reserve have the courage to significantly reduce interest rates? How will financial markets react to this decision? Economists' and analysts' opinions differ. A majority of economists polled by Reuters since May have been calling for two Fed rate cuts this year, but the number increased to three last month.
The Federal Reserve (Fed), the US central bank, will announce its policy rate decision on Wednesday, 18 September. The Federal Reserve (Fed) is an independent agency of the United States government responsible for conducting monetary policy and regulating the country's financial system. Through its control over the Federal Funds Rate (FFR), the Fed influences employment levels and price stability and strives to strike a balance between maintaining low inflation and fostering sustained economic growth. Additionally, the Fed's actions affect the cost of borrowing for both businesses and consumers. That ultimately impacts economic activity and inflation levels.
Investors and analysts await a decision regarding the US interest rate—the primary global benchmark for other countries' central banks. There is a strong likelihood that the global market will respond significantly to this data. The announcement on 18 September will be critical for several reasons:
1. A rate reduction in the United States would mark the new phase of rate reductions.
2. The rate decrease would provide a fresh impetus for both the US and global economies.
3. Currently, the US labour market is cooling off, which could lead to serious issues if there are no policy changes.
According to Fed data, inflation decreased significantly in August to 3.2% YoY, compared to the mid-2022 level of about 7%. The unemployment rate increased from 3.5% when the Fed ceased raising rates to 4.2%. Monthly job growth has also slowed. ‘Lower inflation and high unemployment are the two most significant factors driving the decision to lower interest rates’, says Kar Yong Ang, a financial market analyst at Octa Broker. Recently, the inflation seems to have stabilized. The consumer price index (CPI) has been declining over the past two years. The market has been anticipating a reduction in interest rates and a weakening of the US dollar for over a month. This situation is reflected in the decline of the USD index (DXY) and the rise of XAUUSD. There have also been indications of an impending rate cut from the speeches of the Federal Reserve Chair, Powell. Indeed, the factors behind the decline are both objective and significant. Therefore, the market has assigned a 100% likelihood of a rate reduction. The only uncertainty remaining is the magnitude of the decrease.
On Wednesday, 18 September, the Federal Reserve (Fed), the US central bank, will release projections in conjunction with the interest rate decision. Predictions of further interest rate reductions could significantly impact the market. Based on preliminary expectations, the interest rate is expected to stand at approximately 4.0% one year from now. It is also essential to pay close attention to the upcoming Fed conference, where the central bank will explain its position and provide information on future plans. Additionally, it should be noted that the Fed meeting on Wednesday will be the final one prior to the election of the new US president. The election outcome will likely influence the subsequent course of development for the country.
The main topic of discussion on the agenda, which concerns many experts and analysts, is how aggressive the Fed will be in their decision and whether they will choose to reduce the interest rate by 50 basis points in one go. ‘The market has prepared for a scenario involving a change in the interest rate of 0.25 percentage points and will not be significantly affected by this change. We anticipate exactly such a move at the current meeting. However, there is a possibility of a 0.5 percentage point decrease, which could trigger the bullish trend in the stock and precious metals markets’, argues Kar Yong Ang, a financial market analyst at Octa Broker.
On the eve of a rate cut, gold strengthened its position and reached new highs.. As of September, XAUUSD has increased by 3% and is continuing its upward trend. According to analysts at Octa, a 25 bps reduction in the interest rate will not significantly impact the future growth of the XAUUSD exchange rate as the market as the market can manage such a development. Experts assume that the price will remain around $2,600 per troy ounce without further changes. However, if there is a further 50 bps reduction in interest rates, the XAUUSD may exceed the $2,700 level per troy ounce.