https://www.cbsnews.com/news/interest-rates-federal-reserve-september-meeting-stocks/

Note: In addition to the video, please see the following article included at the above-referenced internet address:

“What the Federal Reserve Is Likely to Do after Stock Selloff”

According to the article, renewed concerns about the U.S. economy could have a major impact on Americans that go well beyond the recent 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 in September 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 percent to 4.25 percent 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 the media. “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 recently, 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 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 percent to 5.5 percent 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.

Projected Interest Rate Cuts

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 percent to 5 percent, 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 percent to 4.5 percent. 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 percent and 4.25 percent. But some analysts expect even deeper cuts, with almost 20 percent forecasting the benchmark rate could be as low as 3.75 percent to 4 percent 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 one percentage point lower, or in a range of 4.25 percent to 4.5 percent.

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.”

Discussion Questions

1. What is the Federal Reserve?

The Federal Reserve is the central bank of the United States. It was founded by the U.S. Congress in 1913. The Federal Reserve’s fundamental duties include conducting national monetary policy (which includes establishing interest rates), supervising and regulating banks, maintaining financial stability, and providing banking services. Although Federal Reserve board members are appointed by the president, it is designed to function independently of political influence

2. In your reasoned opinion, should the Federal Reserve schedule an emergency meeting regarding interest rates? Why or why not?

As indicated in response to Video 2, Discussion Question Number 1 of this newsletter, one of the Federal Reserve’s fundamental duties is conducting national monetary policy. One of the most powerful tools available to the Federal Reserve in influencing the nation’s economy is its ability to establish interest rates. It does so through the following mechanisms: (1) The federal funds rate, which is the rate at which commercial banks borrow and lend their excess reserves to each other overnight, is set by the Federal Reserve based on prevailing economic conditions; (2) The Federal Reserve’s actions influence the interest rates that retail banks charge for mortgages and other loans; and (3) The rate for the “Overnight Reverse Repurchase Facility” and the “Interest on Reserve Balances” also help set the range for interest rates.

Think of interest rates as the cost of borrowing money.

Economists generally agree that if the Federal Reserve elects to raise interest rates, that will have a dampening effect on the nation’s economy, as it becomes more expensive (and therefore less likely) for potential borrowers to borrow money. However, if fewer people borrow money, less money will circulate through the nation’s money supply, therefore having a dampening effect on inflation.

Economists also generally agree that if the Federal Reserve elects to lower interest rates, that will have an opposite effect on the nation’s economy. More particularly, as it becomes less expensive (and therefore more likely) for potential borrowers to borrow money, they will in fact borrow, and this will stimulate the economy. However, if more people borrow money, more money will circulate through the nation’s money supply, therefore increasing inflation.

In terms of your author’s opinion regarding whether the Federal Reserve should schedule an emergency meeting regarding interest rates, if the effect of such a meeting would be to reduce interest rates, that is a decisive “No!” Although inflation is less pronounced now than it has been since 2021, there is still more work to be done. Additionally, your author is concerned that if interest rates fall, that will give sellers the opportunity and incentive to “fill the gap” with higher product prices. Your author is convinced that this is exactly what happened in the real estate market during the recent sustained period of low mortgage interest rates. Although short supply relative to demand was a factor in the explosion of real estate prices in recent years, it was not the only factor—again, low interest rates gave sellers an opportunity to “pad” (i.e., increase) the purchase price. (“File” this one in the “consumer can never get a break” category!)

3. In your reasoned opinion, should the Federal Reserve’s monetary policy regarding interest rates be more responsive to public opinion? Should it be more susceptible to politics and the political process? Explain your responses.

These are opinion questions, so student responses may vary. In your author’s opinion, the Federal Reserve’s monetary policy regarding interest rates should not be more responsive to public opinion, nor should it be more susceptible to politics and the political process. Keep in mind that the Federal Reserve was created and intended to be an independent federal administrative agency. Your author is confident that the “steady hand” and “trained mind” of the Federal Reserve is a much better steward of the U.S. banking system and economy than are the “fickle winds” of public opinion and the gamesmanship of politics. In your author’s opinion, the sage leadership of the independent Federal Reserve has been a substantial contributing factor resulting in U.S. inflation being at its lowest level (2.9 percent in July 2024, at an annualized rate) since 2021. At its next interest rate meeting September 17-18, the Federal Reserve can and certainly will consider a modest (perhaps one-quarter of a percentage point) reduction in interest rates, your author believes that there is no compelling case for an emergency meeting until then.