The Federal Reserve is expected to announce Wednesday its first interest rate cut since 2020. How big that cut will be remains to be seen, but it is widely expected to target a 0.25% reduction from its current 5.3% level.
The economy continues to send mixed signals. The unemployment rate, at 4.2%, remains historically low — but has inched up in four of the last five months, a trend that has often preceded recessions. While layoffs remain low, hiring has virtually ground to a halt, especially in some white-collar professions, making the job search process unusually difficult for many.
A retail sales report on Tuesday showed a steady pace of spending in the U.S. overall, but with some discretionary categories, like restaurant spending, significantly weaker.
Although a cut is almost certain to happen based on what the central bank has been signaling over the last several weeks, it remained unclear heading into Wednesday whether the Fed would enact a 0.25% or 0.5% reduction. The latter figure was seen by some as needed to ward off a looming recession, while others stated it would indicate a negative surprise that implies economic weaknesses that the market has been missing.
In a note to clients in advance of Wednesday’s Fed statement, Bank of America economists said that while there was a case to be made for 0.5% based on weakening data, the “base case” — meaning the most likely scenario — was for the economy to experience a “soft landing” of relatively low unemployment and relatively low inflation — but with concerns about ongoing deterioration lingering.
“The main message from the meeting should be one of cautious optimism despite downside risks,” they wrote.
