As the markets brace for the upcoming interest rate cut, investors and analysts are preparing for the effect it could have. The Fed doesn’t want to cut rates too quickly again, and spike inflation as this has been a previous issue. They will be meeting this week on September 17th and 18th, where most economists believe an interest rate cut will be finalized. If this happens, this will be the first interest rate cut since March of 2020 when COVID had just begun.
Most experts predict that the cut will be about 25 to 50 basis points. The fear with a 50-basis point cut is that it will send a lot of volatility throughout the market. The Feds goal with this cut is to keep the economy stable and send more of a conservative message and not an aggressive one. The labor market has been showing signs of slowing, but not to the point where it can afford a bigger cut. Moreover, although the labor market has been showing signs of slowing, it is unclear whether this trend could support a large cut, or if it could sustain the current levels.
However, another point that has been made by experts is whether the Fed waited too long to make the interest rate cut. After analysts have seen that unemployment has gone up in recent months, there was advocation for a more aggressive cut this time around. Even a potential emergency meeting was brought up to handle the affect the labor market may have. The Fed made it clear that they would only make an emergency cut if the labor markets continued to perform poorly.
The potential decision to cut rates has been in discussion for the past year. The big question has been how much to cut the rates by? When cutting interest rates the goal is to stimulate economic performance and have the markets do well. As mentioned above, the reason these interest rate cuts are discussed so much is because a cut that is too quick may cause inflation to rise, which has been an issue in past years.
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