The Federal Reserve is anticipated to announce its first interest rate cut since 2020 on Wednesday. Analysts predict this cut will likely be a quarter-point reduction from the current rate of 5.3%, although the exact size of the reduction remains uncertain.
The economic landscape presents mixed signals. The unemployment rate, at 4.2%, is historically low but has increased in four of the past five months, a pattern that often precedes recessions. While layoffs remain low, hiring has largely stagnated, particularly in white-collar sectors, complicating job searches for many individuals.
A retail sales report released on Tuesday indicated steady overall spending in the U.S., although spending in discretionary sectors, such as dining out, showed signs of weakening.
Federal Reserve Chair Jerome Powell addressed the Senate Banking Committee in July, highlighting the central bank’s concerns. While a rate cut seems likely based on the Fed’s recent communications, it’s unclear if the reduction will be a quarter-point or a half-point. Some experts argue that a half-point cut may be necessary to avert a recession, while others suggest it would indicate economic weaknesses that have yet to be acknowledged by the markets.
In a note prior to Wednesday’s announcement, economists from Bank of America stated that while evidence supports a possible 0.5% cut due to weakening data, they view a “soft landing” scenario—characterized by low unemployment and inflation—as the most probable outcome, despite ongoing risks.
Market participants have varying opinions on future cuts, with many believing additional reductions will be crucial. Traditionally, the Fed prefers gradual adjustments, typically in 0.25% increments, unless faced with an urgency. However, a significant number of market observers expect the Fed to lower rates by at least 1.5% across the next four meetings.
Wells Fargo’s chief economist, Jay Bryson, places the likelihood of a recession at about one in three, citing rising delinquencies and a decrease in the savings rate that suggests consumers are overextending themselves to cope with inflation.
“The economy is showing some weaknesses,” Bryson noted.
The Fed intends for the anticipated cut and those likely to follow over the coming months to stabilize the economy against further decline. However, how quickly consumers and businesses will respond to lower rates remains uncertain, particularly if overall demand continues to weaken.
Some experts perceive the current economic conditions as stable. David Mericle, chief U.S. economist at Goldman Sachs, emphasized that layoffs are low, job openings high, GDP growth is robust, and no significant adverse events have occurred.
Conversely, Citi’s economists caution that a more pronounced downturn may be imminent. They point to surveys indicating that the highest percentage of small businesses since 2010 expect earnings to decline, coupled with expected subdued hiring. They also observe a lack of increase in home-buying and construction activity despite falling mortgage rates, suggesting weak demand.
Citi economists remarked, “Companies have curtailed hiring to manage labor costs,” warning that if this trend continues, it could lead to more active workforce reductions.