The United States Federal Reserve is expected
to lower interest rates in response to slowing inflation and cooling the labour
market. Will the Federal Reserve have the courage to significantly reduce
interest rates? How will financial markets react to this decision? Economists’
and analysts’ opinions differ. A majority of economists polled by Reuters
since May have been calling for two Fed rate cuts this year, but the number
increased to three last month.
● The Federal
Reserve (Fed), the US central bank, will be in the spotlight on Wednesday, 18
September at 6:00 p.m. UTC, as they announce their latest interest rate
decision.
● The Fed has
kept its federal funds rate (FFR) unchanged for over a year. It last raised its
base rate in July 2023, citing inflationary pressures.
● In the
current environment of lower inflation and increased concerns about the labour
market, reducing the interest rate is possible.
● According
to Reuters, most economists expect the Fed to cut the key rate by at least 25
basis points (bps).
● Octa
analysts believe that the stock market may perceive a 25 bps reduction in the
interest rate negatively, and they are clearly expecting a more significant
decline.
● Octa
analysts do not expect an interest rate change of more than 25 bps at the
upcoming meeting but believe that a rate cut of 50 bps is possible.
● The XAUUSD
has increased significantly due to market expectations of a 25 bps reduction in
interest rates. If the Fed were to reduce rates by 50 bps, the XAUUSD could
potentially rise above $2,700.
● Following
the release of the Fed’s decision, the FOMC projections and dot plot data are
anticipated to be published. This could significantly impact the markets.
The Federal Reserve (Fed), the US central
bank, will announce its policy rate decision on Wednesday, 18 September. The
Federal Reserve (Fed) is an independent agency of the United States government
responsible for conducting monetary policy and regulating the country’s
financial system. Through its control over the Federal Funds Rate (FFR), the
Fed influences employment levels and price stability and strives to strike a
balance between maintaining low inflation and fostering sustained economic
growth. Additionally, the Fed’s actions affect the cost of borrowing for both
businesses and consumers. That ultimately impacts economic activity and
inflation levels.
Investors and analysts await a decision
regarding the US interest rate—the primary global benchmark for other
countries’ central banks. There is a strong likelihood that the global market
will respond significantly to this data. The announcement on 18 September will
be critical for several reasons:
1. A rate reduction in the United States would mark the new phase of rate
reductions.
2. The rate decrease would provide a fresh impetus for both the US and global
economies.
3. Currently, the US labour market is cooling off, which could lead to serious
issues if there are no policy changes.
According to Fed data, inflation decreased
significantly in August to 3.2% YoY, compared to the mid-2022 level of about
7%. The unemployment rate increased from 3.5% when the Fed ceased raising rates
to 4.2%. Monthly job growth has also slowed. ‘Lower inflation and high unemployment are the two most significant
factors driving the decision to lower interest rates’, says Kar Yong Ang, a
financial market analyst at Octa Broker. Recently, the inflation seems to have
stabilized. The consumer price index (CPI) has been declining over the past two
years. The market has been anticipating a reduction in interest rates and a
weakening of the US dollar for over a month. This situation is reflected in the
decline of the USD index (DXY) and the rise of XAUUSD. There have also been
indications of an impending rate cut from the speeches of the Federal Reserve
Chair, Powell. Indeed, the factors behind the decline are both objective and
significant. Therefore, the market has assigned a 100% likelihood of a rate
reduction. The only
uncertainty remaining is the magnitude of the decrease.
On Wednesday, 18 September, the Federal Reserve (Fed), the US central
bank, will release projections in conjunction with the interest rate decision. Predictions
of further interest rate reductions could significantly impact the market.
Based on preliminary expectations, the interest rate is expected to stand at
approximately 4.0% one year from now. It is also essential to pay close
attention to the upcoming Fed conference, where the central bank will explain
its position and provide information on future plans. Additionally, it should
be noted that the Fed meeting on Wednesday will be the final one prior to the
election of the new US president. The election outcome will likely influence
the subsequent course of development for the country.
The main topic of discussion on the agenda,
which concerns many experts and analysts, is how aggressive the Fed will be in
their decision and whether they will choose to reduce the interest rate by 50
basis points in one go. ‘The market has
prepared for a scenario involving a change in the interest rate of 0.25
percentage points and will not be significantly affected by this change. We
anticipate exactly such a move at the current meeting. However, there is a
possibility of a 0.5 percentage point decrease, which could trigger the bullish
trend in the stock and precious metals markets’, argues Kar Yong Ang, a
financial market analyst at Octa Broker.
On the eve of a rate cut, gold strengthened
its position and reached new highs.. As of September, XAUUSD has increased by
3% and is continuing its upward trend. According to analysts at Octa, a 25 bps
reduction in the interest rate will not significantly impact the future growth
of the XAUUSD exchange rate as the market as the market can manage such a
development. Experts assume that the price will remain around $2,600 per troy
ounce without further changes. However, if there is a further 50 bps reduction
in interest rates, the XAUUSD may exceed the $2,700 level per troy ounce.
About Octa
Octa is an
international broker that has been providing online trading services worldwide
since 2011. It offers commission-free access to financial markets and a variety
of services used by clients from 180 countries who have opened more than 52
million trading accounts. To help its clients reach their investment goals,
Octa offers free educational webinars, articles, and analytical tools.
The company is involved in a
comprehensive network of charitable and humanitarian initiatives, including the
improvement of educational infrastructure and short-notice relief projects
supporting local communities.
Since its foundation, Octa has won more
than 70 awards, including the ‘Best Forex Broker 2023’ award from
AllForexRating and the ‘Best Mobile Trading Platform 2024’ award from Global
Brand Magazine.
This article was written by FL Contributors at www.forexlive.com.
