Zhitong Finance APP noticed that the Federal Reserve will begin a key shift this week, cutting interest rates for the first time in over four years to achieve a rare soft landing for the U.S. economy.
Given that inflation seems to be under control and there are signs of weakness in the U.S. labor market, it is widely expected that officials will lower the benchmark interest rate by at least 25 basis points at the end of the two-day meeting on Wednesday. In the financial markets, some traders - as well as economists at the largest U.S. bank, JP Morgan - are even prepared to cut the benchmark interest rate by half a percentage point.
This is a watershed moment that will start to free the world's largest economy from the long-standing burden of high borrowing costs. The Fed's move may come with a signal that it is prepared to provide more relief to U.S. businesses and households in the coming months. This combination should continue to drive the repricing of trillions of dollars in global assets that has already begun.
Mark Zandi, Chief Economist at Moody's Analytics, said, &#34;This is a big positive for the U.S. and global economy. It largely removes the drag on the economy from the Fed and allows the economy to continue to move forward. It has been helpful, with stock prices higher than they would otherwise be.&#34;
Mortgage rates fall from multi-decade highs
However, the path ahead for policymakers and the U.S. economy remains uncertain. Many investors and some economists are concerned that the Fed has waited too long, putting the labor market and economic growth in jeopardy and injecting volatility into the financial markets. The latter was reflected in the U.S. Treasury market on Friday, as traders suddenly resumed betting on a 50 basis point rate cut.
The upcoming presidential election in November has also put the Fed's decision in an awkward position. Republican candidate and former President Donald Trump warned that the Fed should not cut rates on the eve of the election, while Democratic Senator Elizabeth Warren pressured officials to lower rates by 75 basis points.
Priya Misra, Portfolio Manager at JP Morgan Asset Management, said, &#34;This is a critical move. A rate cut for a soft landing is very rare.&#34;
JP Morgan is the only major U.S. bank to hold the view of cutting rates by half a percentage point. While other banks have adjusted their rate cut expectations to 25 basis points, the bank's Chief U.S. Economist Michael Feroli reiterated in a report to clients last Friday that cutting rates by half a percentage point is the &#34;right thing to do.&#34;
Misra also hopes the Fed will cut rates by half a percentage point first, but she said the likelihood of a 25 basis point cut is slightly higher, as policymakers may still have concerns about inflation. She added that if the Fed does cut rates by a quarter of a percentage point, market reaction will largely depend on how officials &#34;adjust&#34; the magnitude of the rate cut.
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Therefore, after the rate cut is confirmed, investors and analysts will focus on two things: the Federal Reserve's benchmark interest rate path forecast (i.e. dot plot), which will also be released as part of the latest quarterly forecast, and the press conference held by Federal Reserve Chairman Jerome Powell at 2:30 p.m. on the same day.
These forecasts will provide each policymaker's year-end expectations for each year until 2027. Although anonymous, they still include officials' expectations for the extremely short period from now until the end of 2024. When policy is at a turning point, officials rarely provide such explicit disclosures, but the timing of the quarterly forecast leaves them no choice.
David Wilcox, former head of the Federal Reserve Board's Research and Statistics Division and current director of U.S. Economic Research at Bloomberg Economics, said, &#34;Currently, the year-end dot plot is particularly inspiring. Obviously, this is more interesting because they are about to start a rate-cutting cycle.&#34;
Specifically, the dot plot will show how many members of the Federal Open Market Committee have already supported further rate cuts in November and December (according to surveys of economists, this number may be a majority), and how many expect one of the rate cuts to be half a percentage point. If the latter number represents a significant minority, it means the Federal Open Market Committee is not far from taking more aggressive action.
Regardless of the numbers, it will show a huge difference from the forecast in June, when no policymaker expected the number of rate cuts this year to exceed two.
Traders' forecasts for future interest rate trends are more aggressive. Since the disappointing July employment report, they have been roughly betting on a 1% rate cut in 2024 since early August. As of last Friday, they expected a rate cut of about 114 basis points by the end of December, including this week's rate cut. By the end of 2025, they expect the benchmark interest rate to fall by 3%.
Then comes the confrontation between Powell and the reporters.
If the committee cautiously cuts rates by 25 basis points at the beginning, those who believe that the labor market risks are worsening will hope that the Fed chair will signal that officials are prepared to take more decisive action when necessary. Wilcox said Powell himself may want to keep options open for future meetings, regardless of how much they cut rates at the outset.
&#34;Whether it's announcing a 25 basis point hike or a 50 basis point hike, it could be a difficult decision to reach,&#34; said Wilcox, who has advised three former Fed chairs. &#34;In fact, people can make divergent decisions on this.&#34;
&#34;Soft landing&#34; is difficult to achieve
Jerome Powell has hinted that he is prepared to act if the unemployment rate rises. In a speech delivered on August 23 at Jackson Hole, Wyoming, the Federal Reserve Chair stated that the Fed &#34;will not seek or welcome further cooling of the labor market.&#34;
His colleague, Federal Reserve Governor Christopher Waller, was more direct in his remarks on September 6. He not only indicated that it is time to lower interest rates now, but also explicitly stated that further deterioration in the labor market would give the Federal Open Market Committee reason to &#34;act quickly and forcefully.&#34;
The consequences of falling behind could be severe. Former Vice Chairman of the Federal Reserve, Alan Blinder, believes that the Fed has only achieved a soft landing once in its history, in the mid-1990s. At that time, the duration of high interest rates was just enough to curb inflation without causing a recession.
More commonly, they trigger economic downturns. Excluding the crisis of 2020, the six economic recessions in the past 50 years have pushed the unemployment rate to an average peak of 8.6%. Any such scenario would result in millions of people becoming unemployed.
The current unemployment rate is 4.2%, significantly higher than the historical lows experienced for most of the past three years. Until April 2023, the rate remained at 3.4%, but has since risen, triggering the well-known &#34;Sam Rule&#34; this summer, which typically indicates an economy in recession.
Michael Kelly, Global Head of Diversified Assets at PineBridge Investments, is not predicting an economic recession, but he is very concerned and is buying long-term U.S. government bonds to hedge against this outcome.
Kelly said, &#34;What we've seen in the past is that once the labor market really collapses, they collapse quickly.&#34; &#34;Once the rocks start rolling down the mountain, it's hard to stand in front of them and stop them.&#34;
However, the Fed is very close to achieving a goal that most economists thought unlikely, as by mid-2021, with the pandemic weakening global supply chains, prices spiraled out of control. The inflation gauge favored by the Fed fell to 2.5% in the year ending in July, and the unemployment rate remained low.
When the Fed began its rate hike cycle in March 2022 with a modest 25 basis points increase, few economists predicted that the Fed would make it this far unscathed. Subsequently, officials accelerated the pace of rate hikes in subsequent meetings, eventually adjusting the target range for the benchmark rate to 5.25%-5.5%, where it currently remains. They have hiked rates significantly six times, each time by 50 or 75 basis points.
BI strategists Ira F. Jersey and Will Hoffman stated, &#34;Unless the Fed cuts rates by 0.25% at the meeting, the market will be surprised, but clues may be gleaned from the change in the median forecast for 2025 from the economic projections summary. If the Fed's rate outlook changes, short-term rate markets may quickly adjust reflexively after the Fed announces a rate cut. We expect the theme of 'data dependency' to continue at the post-meeting press conference.&#34;
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During this process, the US economy has shown remarkable resilience. After the spending cuts began, the unemployment rate even decreased. Job vacancies that soared during the pandemic remain high, and price increases remain strong, rising to the highest level in 40 years in the summer of 2022.
However, recently the US economic growth has slowed. While layoffs remain low, hiring has stalled, making it harder for the unemployed to find work. Job vacancies have dropped to the lowest level since 2021. Meanwhile, rising mortgage rates and soaring house prices have squeezed housing affordability, leading to annual new home sales in 2023 dropping to the lowest level in nearly 30 years.
Federal Reserve Chairman and other policymakers insist that the labor market and the overall economy are still in a healthy condition similar to pre-pandemic times. Many members of the committee believe that the risks in the labor market are roughly balanced with the risks posed by inflation.
However, the committee is not united. A few, such as Bullard and Chicago Fed President Gulsby, are concerned that the current threat to employment is most severe. Others, like Atlanta Fed President Bostic and Director Bauman, are still concerned that inflation could rise again.
This means that Wednesday's events - from the committee's statement to forecasts, to every word from Powell - will be closely watched. Investors especially hope to be assured that officials will continue to curb inflation while preventing a downturn in the job market.
Morgan Stanley's Chief Global Economist Seth Carpenter said, &#34;This will require a greater balance between the two aspects of the dual mandate than ever before.&#34; &#34;For the market, they will scrutinize these things rigorously.&#34;
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The Federal Reserve will cut interest rates for the first time in four years this week, aiming to achieve a soft landing for the U.S. economy. It is expected that the benchmark lending rate will be cut by at least 25 basis points, with some analysts even predicting a cut of up to 50 basis points. This move may provide more relief for businesses and households, and drive a repricing of global assets. However, the future economic path remains uncertain, with investors expressing concerns about the timing of the rate cut

- The Federal Reserve is set to make a significant shift by cutting interest rates for the first time in over four years to achieve a soft landing for the US economy, with expectations of at least a 25 basis point reduction. This move aims to free the economy from long-standing high borrowing costs and potentially provide relief to businesses and households in the coming months.
- While the decision is seen as positive for the economy, concerns linger about the Fed's timing and the potential impact on labor markets and economic growth, with uncertainties surrounding future rate adjustments. The upcoming Fed meeting and Chairman Jerome Powell's statements will be closely monitored for signals on the Fed's stance on inflation and employment.
- Market reactions post-rate cut confirmation will focus on the Fed's rate path projections and Powell's press conference, with a keen interest in how officials navigate the delicate balance between curbing inflation and safeguarding employment stability amidst economic uncertainties.

The Federal Reserve will cut interest rates for the first time in four years this week. Can it protect the US economy from a soft landing?