The US Federal Reserve dramatically cut interest rates for the first time in more than four years on Wednesday night in an effort to support the world’s biggest economy.
The central bank reduced borrowing costs by 0.5 percentage points – a larger than average cut – in what was the first reduction in borrowing costs since the onset of Covid in March 2020.
The “dot plot” published by the central bank also indicated that interest rates could be cut by another half a percentage point before the end of the year. The Fed’s next decision will be announced on November 7, after the US election on November 5.
The decision came hours before the Bank of England’s latest rate-setting meeting on Thursday, at which policymakers are expected to hold rates steady after cutting interest rates for the first time in four years in August.
The Fed’s cut was accompanied by a warning that the outlook for the world’s largest economy was “uncertain”.
However, chairman Jerome Powell insisted that the large reduction was a sign that the fight against inflation was coming to an end and said the US economy was healthy, despite concerns it could be heading towards recession.
Mr Powell said: “Our patient approach over the past year has paid dividends. Inflation is now much closer to our objective, and we have gained greater confidence that inflation is moving sustainably toward 2pc.
“The labour market is in solid condition and our intention with our policy today is to keep it there. You can say that with the whole economy.”
However, the decision drew immediate criticism from some supporters of Donald Trump, who accused the Fed of trying to influence the US election.
The timing of the rate cut, less than two months before the election, is seen as beneficial to Kamala Harris, who is fighting an incumbent campaign.
The Vice President said the rate cut was “welcome news for Americans who have borne the brunt of high prices.”
Supporters of Donald Trump immediately seized upon the size of the Fed move to claim that it was a political move.
Senator Tommy Tuberville, of Alabama, said on X: “The Fed’s drastic rate cut is shamelessly political. Our nation’s central bank has no business moving rates this close to an election and is clearly trying to tip the balance in favor of Kamala Harris.”
Mr Trump earlier this year accused Mr Powell of being “political” and said he would cut interest rates to “help the Democrats”.
The Fed’s decision to begin cutting rates on Wednesday marked the closest the central bank has come to a US presidential election when launching an easing cycle in nearly half a century.
While interest rate policy is rarely static during election years, kicking off a brand new rate-cutting phase with fewer than 10 weeks to polling day has happened only twice before – in 1976 and in 1984.
Mr Powell insisted that Fed officials gave no consideration to the election in their decision.
He said: “This is my fourth presidential election at the Fed. It’s always the same. We’re always going into this meeting in particular and asking, ‘What’s the right thing to do for the people we serve?’ We do that and we make a decision as a group and we announce it. That’s always what it is. Nothing else is discussed.”
The decision to cut rates had been widely expected ahead of the meeting, amid slowing inflation and signs of a weakening economy.
Mr Trump told a town hall in Flint, Michigan, on Tuesday night earlier this week that a rate cut would suggest the “economy is now not good … Otherwise, you wouldn’t be able to do it.”
The former president has previously suggested he would take away the Fed’s independence if re-elected and set interest rates himself.
“I think that in my case, I made a lot of money, I was very successful, and I think I have a better instinct than in many cases, people that would be on the Federal Reserve or the chairman,” Mr Trump said in August.
The Fed’s move brings its target lending rate to a range of 4.75pc to 5pc, down from 5.25pc to 5.50pc.
The decision instantly boosted markets, with the S&P 500 up by as much as 0.6pc up and tech-heavy Nasdaq 0.8pc.
Mr Powell said recent data “indicates an economy that is still growing at a solid pace” despite a flurry of data suggested that the US labour market is cooling. The US economy added fewer jobs than expected both in July and August.
The remarks suggest that a so-called soft landing is still within reach, meaning inflation will have fallen without high interest rates triggering a recession.
Inflation in the US currently stands at 2.5pc, although fears still linger over price pressures in the housing market.
Figures earlier on Wednesday morning showed that UK inflation held steady last month at 2.2pc, according to the Office for National Statistics (ONS). This was unchanged from July despite a big jump in European airfares as parents took their children away for the school holidays. The headline rate was also in line with economists’ expectations.
08:42 PM BST
Signing off…
Thanks for joining us for our live coverage of the Fed decision, which has brought a half a percentage point cut to US rates.
The Bank of England is making its own announcement tomorrow at noon – although it is widely expected to keep rates unchanged.
08:35 PM BST
Biden: ‘we just reached an important moment’
US president Joe Biden has posted on social network X that America has “just reached an important moment: Inflation and interest rates are falling while the economy remains strong”.
We just reached an important moment: Inflation and interest rates are falling while the economy remains strong.
The critics said it couldn’t happen – but our policies are lowering costs and creating jobs.
I’ll speak tomorrow about what this means for Americans.
— President Biden (@POTUS) September 18, 2024
08:28 PM BST
Fed might have cut rates in July had it seen that month’s jobs report, Powell says
The Fed might have first cut interest rates in late July had it seen the jobs report for the month, released days later, that showed softening in the US labour market, chairman Jerome Powell said this evening.
He told reporters:
If you ask, you know, if we’d gotten the July report before the meeting, would we have cut? We might well have. We didn’t make that decision, but you know, we might well have.
08:25 PM BST
Independent central banks better, says Powell, despite Trump criticism
Countries with central banks independent from control by politicians have better inflation outcomes, Jerome Powell told reporters just before wrapping up tonight’s press conference.
US Federal Reserve policymakers discuss “nothing else” but how to serve the public as it meets on interest rates, Fed Chair Jerome Powell said Wednesday.
“Our job is to support the economy on behalf of the American people, and if we get it right, this will benefit the American people significantly,” Mr Powell said. “We don’t put up any other filters.”
Donald Trump has repeatedly criticised Mr Powell, who he first appointed to run the Fed, and has suggested that its decisions are political – accusations the US central bank has strongly refuted.
The former president recently suggested the US president should have “at least” a say over Fed decisions.
08:23 PM BST
Big cut sends dollar on ‘on a downward spiral’
The dollar has been sent ‘dollar on a downward spiral’, according to Kathleen Brooks, research director at XTB:
The market was right, economists were mostly wrong. The Federal Reserve started their rate-cutting cycle with a bang and cut rates by [half a percentage point]. However, there was more drama to come. The Fed has also revised down their expectations for interest rates in the short to medium term, while marginally revising higher their longer-term outlook for interest rates …
Combined, a big rate cut and a dovish assessment of future rate cuts, has sent the dollar on a downward spiral, the gold price has hit a fresh record high and stocks initially spiked higher, especially the US mid-cap index …
The market-cap weighted S&P 500 rose to a fresh record high today, as did the S&P 500 minus the magnificent 7. Interestingly, Microsoft, the world’s second largest company, is currently lower on the day, suggesting that the biggest tech firms will not be leading US stocks higher in the next leg of this stock market rally …
The gold price reminds us that there are some in the market who think that the Fed is cutting rates before inflation has been stamped out of the US economy. It is worth remembering that Jerome Powell would not pre-commit to rate cuts at this meeting, so while the doves are in control at the Fed, nothing is set in stone.
08:16 PM BST
Powell says Fed is not saying ‘mission accomplished’ on inflation
Tonight the Fed came closer than it has before to declaring victory over inflation. Jerome Powell, the Fed chair, said:
We know that it is time to recalibrate our [interest rate] policy to something that’s more appropriate given the progress on inflation.
We’re not saying, ‘mission accomplished’ … but I have to say say, though, we’re encouraged by the progress that we have made.
The US economy is in a good place, and our decision today is designed to keep it there.
08:09 PM BST
Housing inflation is dragging – but real problem is lack of supply
Housing inflation is one piece that is dragging a bit, Jerome Powell told reporters tonight. But he added that the Fed cannot fix issues with housing supply.
The supply problem is for the market and US government to solve, he said.
08:06 PM BST
Powell doesn’t believe Fed waited too long to cut
Fed chair Jerome Powell said he does not believe the central bank waited too long to cut its interest rate target.
“We don’t think we’re behind” on the need to cut rates given the outlook, Mr Powell said.
“We’ve been very patient” with monetary policy and “we’ve waited, and I think that patience has paid dividends” in the form of a convincing lowering of inflation.
08:04 PM BST
Wall Street advances after Fed cuts rates
US stocks briefly shot higher on Wednesday after the Federal Reserve cut interest rates by 50 basis points, the high side of estimates for its first cut in more than four years.
Citing a “greater confidence” that inflation is moving toward the central bank’s 2pc target, the Fed cut rates by half of a percentage point, as it now focuses on keeping the labour market healthy.
Trading was choppy. Prior to the announcement, the S&P 500 oscillated between modest gains and losses. The benchmark rose as much as 1pc after the announcement before paring gains.
Brian Jacobsen, chief economist at Annex Wealth Management, said:
The Fed ended the pause with a bang. It’s a strong signal that they cut by [half a percentage point] and expect another [half a percentage point] of cuts this year.
The Fed is projecting that by front loading the cuts they can stick the landing with the unemployment rate at 4.4pc and inflation dropping to target quickly.
08:03 PM BST
Middle Eastern central banks copy Fed
The United Arab Emirates and Bahrain have cut their interest rates tonight by half a percentage point, matching the cut by the Fed. Qatar cut rates by an even bigger 0.55 of a percentage point, while Kuwait cut a key interest rate by a quarter of a percentage point.
07:57 PM BST
‘Big surprise’ is future steer on rate cuts
Peter Cardillo, a chief market economist at Spartan Capital Securities, says there was a “big surprise” in the Fed’s announcements tonight:
I was expecting a [quarter percentage] point cut. I thought they would go gradual, but they were more generous than I expected them to be.
The big surprise here is that they’ve indicated further cuts, possibly another [half a percentage point] by year end.
The Fed move was dovish. I guess their biggest fear is that the labor market is getting overly weak, and that I think is the reason why they did it.
07:56 PM BST
Jumbo rate cut ‘controversial’, says economist
Today’s rate cut was “controversial”, an economist has said.
Brian Jacobsen, chief economist at Annex Wealth Management, said:
The Fed ended the pause with a bang. It’s a strong signal that they cut by [half a percentage point] and expect another [half a percentage point] of cuts this year. This was controversial.
Powell has the lowest number of dissents for decisions since the 1950s. The last time there was a dissent was in June 2022 … This time the dissent was because they wanted a slower pace of cuts.
The Fed is projecting that by front loading the cuts they can stick the landing with the unemployment rate at 4.4pc and inflation dropping to target quickly.
07:54 PM BST
Fed ‘didn’t rock the boat too much’, says analyst
Ryan Detrick, chief market strategist at Carson Group, said:
The Fed didn’t rock the boat too much, [half a percentage point] was expected. The reality is the Fed understands the slowing of the labour market is the big worry. This … cut is the Fed acknowledging that inflation isn’t a major problem anymore. And now they can focus on the weakening labour market.
07:52 PM BST
US close to full employment, says Powell
Fed chair Jerome Powell promised “close watching” of the labour market, saying that “clearly labour market conditions have cooled off”.
But the US economy is doing well and it is still close to having full employment, he said.
“The labour market is actually in solid condition,” he said. “Our intention with our policy move today is to keep it there.”
07:49 PM BST
Labour market strength can be maintained with appropriate policy
The US central bank is increasingly confident that strength in the jobs market can be maintained with an “appropriate recalibration” of policy, Fed chair Jerome Powell said this evening.
His comments at a press conference came after the Fed opted for a bolder half percentage point interest rate cut, with Mr Powell noting: “Our economy is strong overall and has made significant progress toward our goals over the past two years.”
07:48 PM BST
Future cuts will be decided ‘meeting by meeting’
Future interest rate cuts will be decided “carefully meeting by meeting”, Fed chair Jerome Powell told a press conference tonight.
He said that the labour market has continued to cool and has been a notable step down from earlier this year. But he said that he has confidence that strength in the labour market can be maintained.
07:41 PM BST
US rate cuts will be ‘a marathon and not a sprint’
A marathon of US rate cuts is coming, according to Isaac Stell, investment manager at Wealth Club:
The Federal Reserve has entered the race at pace, opting for the jumbo option, cutting headline interest rates by 0.5 percentage points. This was the first cut to interest rates in 4 years.
Despite there being no significant economic woes on the radar, policy makers have decided to get ahead of the curve as recent payroll reports have shown a gradual slowdown in the jobs market.
This cutting cycle is likely to be a marathon and not a sprint however with a total of [one percentage point] of cuts priced in for the year, likely two further cuts of [a quarter point], and [a percentage point] more next year.
The market was calling for it, and the Fed has delivered. Many may be left wondering what the Fed sees on the horizon to prompt such a bold move.
07:39 PM BST
Smaller companies jump on rate cut
American small cap stocks have surged since 7pm.
The Russell 2000 index of small US companies is up 1.5pc, having been prety flat during the afternoon.
Smaller listed companies are seen as particularly likely to benefit from lower interest rates.
07:35 PM BST
Financial markets betting on more rate cuts than Fed projects
Financial markets are betting that the Fed will deliver more rate cuts by the end of the year than the Fed’s own policymakers project.
Interest-rate futures are pricing in a quarter-point cut in November and a half-point rate cut in December.
The Fed is projecting two quarter-point cuts.
07:26 PM BST
Gold hits a record after Fed rate cut
The price of gold hit an all-time record as spiked after the interest rate decision.
The price is up 0.9pc today at $2597, which is 34pc higher than a year ago.
Lower interest rates make gold, which does not generate interest or dividends, more attractive.
07:24 PM BST
Dollar drops as Fed cuts rates by half a percentage point
The dollar dropped after the Federal Reserve this evening cut interest rates by half a percentage point.
The US dollar index (comparing the dollar to a basket of six currencies) was down 0.46pc on the day at 100.45, the lowest since July 2023.
The dollar is down 0.86pc against the pound today.
07:17 PM BST
Wall Street rises after rate cut
Wall Street is up after the Fed decision, even though many investors had already expected a supersized half point cut.
The Nasdaq is up 0.5pc, while the S&P 500 and Dow Jones are both up 0.3pc.
07:14 PM BST
Rate cut will boost shares, says fund manager
Michael Sheehan, a fund manager at EdenTree Investment Management, said:
Kicking off this cutting cycle with a [half a percentage point] reduction will undoubtedly vindicate those who had argued that the Fed had fallen behind the curve. Any doubts that this cutting cycle would be any less dramatic than previous ones have been firmly laid to rest.
We expect this larger cut … to boost risk assets [such as shares] in the short term. The key for markets, and indeed the Federal Reserve, will be how far the softening of the labour market has to run.
Powell will be hoping that taking aggressive action early will go some way to curtailing a substantial weakening and achieve the elusive soft landing.
07:11 PM BST
Fed has ‘greater confidence that inflation is moving sustainably toward 2pc’
The US central bank has cut interest rates for the first time in more than four years as UK rate-setters are expected to hold on Thursday.
The Federal Reserve in a dramatic move lowered interest rates by 0.5 percentage points on Wednesday night, warning the economic outlook was “uncertain”.
The central bank’s rate-setting committee said in a statement: “The Committee has gained greater confidence that inflation is moving sustainably toward 2pc, and judges that the risks to achieving its employment and inflation goals are roughly in balance.
“The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.”
The first rate cut in the US since March 2020 when Covid struck instantly boosted markets, with the S&P 500 up 0.6pc up 0.8pc.
However there is likely to be some concern as it suggests the Fed sees the economy as weaker than expected.
It comes as rate-setters at the Bank of England on Thursday will vote on whether to cut interest rates for a second time this year, although they are widely expected to hold.
The Fed’s rate cut comes after a flurry of data suggested that the US labour market is cooling and price pressures easing.
Democratic candidate Kamala Harris is likely to use the outsized cut as proof to voters that the party has presided over falling inflation and a growing economy.
Republican candidate Donald Trump earlier this year accused Mr Powell of being ‘political’ and said he would cut interest rates to “help the Democrats”.
07:10 PM BST
Fed rate cut closest to a election in nearly 50 years
The Federal Reserve’s decision to cut interest rates by half a percentage point on Wednesday marked the closest the central bank has come in launching an easing cycle on the cusp of a US presidential election in nearly half a century.
While interest rate policy is rarely static during election years, kicking off a brand new rate-cutting phase with fewer than 10 weeks to Election Day has happened only twice before now – in 1976 and in 1984.
The US central bank is an independent federal agency, and Fed chairman Jerome Powell and other policymakers consistently say political considerations – including approaching elections – do not factor at all in their decisions on interest rates.
“This is my fourth presidential election at the Fed,” Mr Powell said in a press conference following the Fed’s policy meeting in late July. “Anything that we do before, during, or after the election will be based on the data, the outlook, and the balance of risks and not on anything else.”
But Republican presidential nominee Donald Trump claimed earlier this year he thought the Fed might lower rates to help Democrats in the Nov 5 election. Trump said last month that presidents ought to have a say over Fed decisions.
Vice President Kamala Harris, the Democratic presidential nominee, said only that she would respect the Fed’s independence. “As president, I would never interfere in the decisions that the Fed makes,” she said last month.
07:05 PM BST
Fed rate setters vote 11-to-1 for tonight’s big cut
The Federal Reserve has made its first reduction since the pandemic, sharply lowering borrowing costs shortly before November’s presidential election.
Policymakers voted 11-to-1 in favour of lowering the US central bank’s benchmark lending rate to between 4.75 percent and 5.00 percent.
They also penciled in an additional half-point of cuts before the end of the year.
07:03 PM BST
Fed makes supersize cut as it warns ‘the economic outlook is uncertain’
The Federal Reserve has cut rates but warned that “ehe economic outlook is uncertain”. It said:
Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have slowed, and the unemployment rate has moved up but remains low. Inflation has made further progress toward the Committee’s 2 percent objective but remains somewhat elevated.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee has gained greater confidence that inflation is moving sustainably toward 2 percent, and judges that the risks to achieving its employment and inflation goals are roughly in balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.
In light of the progress on inflation and the balance of risks, the Committee decided to lower the target range for the federal funds rate by 1/2 percentage point to 4-3/4 to 5 percent. In considering additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective.
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
07:01 PM BST
US cuts rates for first time in four years
The US Federal Reserve has cut interest rates this evening for the first time in more than four years. At 7pm, the Fed said rates would be cut by half a percentage point to 4.75pc to 5pc.
Senior officials at the US central bank including Mr Powell had indicated that a rate cut was coming, as inflation eases toward the bank’s long-term target of two percent, and the labour market continues to cool in the post-Covid economy.
It comes on a day of uncertain trading on Wall Street, with traders and analysts trying to guess how sharply the Fed would lower its benchmark lending rate from what was a 23-year high of between 5.25pc and 5.50pc.
Wall Street indexes slipped in volatile trading today ahead of the decision, with jitters over the magnitude of the reduction dominating the mood. The FTSE 100 closed down 0.7pc.
The Fed move comes a day before the Bank of England will set Britain’s interest rates, which currently sit at 5pc. Most economists are expecting the bank to keep rates unchanged.
06:49 PM BST
US interest rates expected to fall for first time in four years
The US Federal Reserve is all but certain to cut interest rates this evening for the first time in more than four years. However, the size of the reduction is unusually hard to predict.
Its rate decision is expected at 7pm, and will be followed by a press conference with Fed chairman Jerome Powell.
Senior officials at the US central bank including Mr Powell have indicated that a rate cut is coming, as inflation eases toward the bank’s long-term target of two percent, and the labour market continues to cool in the post-Covid economy.
Traders and analysts remain uncertain about how sharply the Fed will lower its benchmark lending rate from the current 23-year high of between 5.25pc and 5.50pc.
Some are predicting a smaller cut of a quarter of a percentage point, while others believe a bigger half-point reduction is in the works.
A smaller cut would be a more predictable move, while a bigger cut would do more to boost demand – while also running the risk of reigniting inflation.
Erica Groshen, a senior economics advisor at the Cornell University School of Industrial and Labor Relations, said:
It’s around points of inflection that we get the most mixed signals.
The Fed is trying to make sense out of them. And the markets are trying to make sense out of them, and trying to make sense out of how the Fed will interpret them.
Wall Street indexes slipped in volatile trading today, with jitters over the magnitude of the reduction dominating the mood. The FTSE 100 dropped 0.7pc.
06:39 PM BST
Market sentiment ‘very volatile’, says City firm
The stock market is looking “increasingly fragile”, a City investment bank has said.
Susana Cruz, a strategist at Panmure Liberum, said:
We remain bullish on stocks in 2025, but the rally is looking increasingly fragile. Current rate cut expectations have overshot and sentiment is very volatile.
Bloomberg reported that she prefers UK stocks to those listed in Europe and the US.
06:10 PM BST
Rapid cuts to rates not needed, says top US economist
Mixed economic indicators over past month have made investors nervous ahead of the least-predictable Fed decision in years.
Borrowing costs have stayed at their highest levels in over two decades since July 2023, when the Fed last hiked interest rates by a quarter percentage point to between 5.25pc and 5.50pc to combat inflation. But the focus recently has moved to worries about employment.
Dovish commentary from present and former Fed officials recently have led traders to price a 58pc chance of a bigger half point reduction, according to latest data.
Still, some analysts caution that an supersized move from the central bank could spook markets as it would be inconsistent with how the Fed has begun prior easing cycles outside of any brewing crisis.
If the Fed cuts by half a percentage point instead of a quarter point, it will skip reducing rates next month, according to Erica Groshen, an economist at Cornell University who was formerly commissioner of the US Bureau of Labor Statistics.
She added that if it is the other way round, the central bank will lift its “foot off more rapidly” next month. She said:
Fortunately, things don’t seem to be in a high degree of flux like they were during the financial crisis or during Covid when rapid movements were necessary to avoid disaster.
05:48 PM BST
Wall Street flat as traders pause for rate cut news
The S&P 500 has been wavering this afternoon as traders await the Fed’s decision, due at 7pm.
The index is just above the opening level, while the Dow Jones and Nasdaq are just below.
05:35 PM BST
UK interest rates ‘will only be lowered gradually’, says merchant bank
The pound remains up against the dollar today following new inflation data, which further pressured the FTSE 100’s export-focused companies.
Evidence of persistent inflationary pressures led traders to trim bets on the Bank of England cutting rates at its meeting tomorrow, where policymakers are expected to keep rates on hold.
Andrew Wishart, senior UK economist at merchant bank Berenberg, said:
The surge in services prices is more pronounced in the UK than in the other major economies, which explains why we think that UK interest rates will only be lowered gradually.
05:25 PM BST
‘A bit of post-action volatility’ could hit after Fed announcement today
The London Stock Exchange swung into the red on Wednesday as investors nervously await interest rate decisions from central banks in the US and the UK.
The US Federal Reserve is expected to announce a rate cut at 7pm, while the Bank of England is widely expected to keep rates unchanged when it gives an updated tomorrow at noon.
The FTSE 100 fell 0.7pc, while the major US indexes are roughly flat.
Danni Hewson, head of financial analysis at AJ Bell, said:
Yesterday’s rate cut optimism has been replaced with nervousness as investors wait for the Fed to deliver its first downward move since the start of the Covid pandemic.
It’s not a question of whether there will be a cut but of how deep the first cut will be, and with just hours to go expectation is still pretty divided.
There will be investors who’ve made the wrong bet and that’s likely to result in a bit of post-action volatility.
05:15 PM BST
Markets are more confident about a supersized rate cut than economists
There is a fair amount of anxiety in the markets this afternoon over how big the Fed’s rate cut tonight will be.
Ben Woodward, a chartered financial analyst at Waterloo Capital in Texas, says that traders and economists have different views of what the Fed will announce:
There is a significant discrepancy between current market expectations and economist predictions regarding the Federal Reserve’s upcoming interest rate decision this afternoon. If the Fed opts for a [quarter percentage] point cut as most economists expect, it might lead to potential disappointment among some investors.
There is a significant discrepancy between current market expectations and economist predictions regarding the Federal Reserve’s upcoming interest rate decision this afternoon. If the Fed opts for a 25 basis point cut as most economists expect, it might lead to potential… https://t.co/bJxBumDoVs
— Ben Woodward, CFA (@BennettWoodman) September 18, 2024
05:05 PM BST
Interest costs will still rise despite tonight’s expected rate cut, says economist
Interest rates as faced by American companies will still rise, despite the likely rate cut tonight, a leading economist has said. Nick Forrest, of consultancy Baringa, said:
[The expected rate cut] will be welcomed by consumers and the private sector, but the reality is that for many companies, even after [tonight’s expected] interest rate cut, the cost of servicing debt will continue to increase …
In the course of 2024, more than $3 trillion of US companies’ loans and bonds will have fallen due. Many of these expiring loans and bonds were taken out in a rock-bottom interest rate environment and a significant amount of these expiring instruments have been and will continue to be refinanced – meaning new debt is taken out to replace the old debt …
Most of those refinanced loans and bonds will be subject to an interest rate far higher than the debt they replaced. Companies are still seeing the cost of debt mount up alarmingly, with US companies subject to approximately $381bn in additional interest expense at projected interest rate levels between 2024 and 2030.
04:58 PM BST
‘The market has never been so much in the dark, other than during Covid’, says Charles Schwab
A debate over the size of tonight’s Fed rate cut “rages on”, according to Cooper Howard, director of fixed income strategy at Charles Schwab. He said:
The market has never been so much in the dark, other than during Covid, this close to the meeting about what the Fed will do.
The lack of clarity might help explain why yesterday’s early run to record highs fizzled out.
04:37 PM BST
‘High potential for market whiplash’, says wealth manager
There could be a lot of market noise tonight after the Fed announces its plans for interest rates.
Peter Boockvar, chief investment officer at Bleakley Financial Group in New Jersey, said:
There is high potential for market whiplash today.
If Powell cuts [a quarter percentage point], he’ll tell us that [a half point cut] is possible in the coming meetings. If he cuts by [a half point], he’ll tell us not to get used to that cadence.
Either way, this is all market noise as we’ve already priced in so many cuts through next year.
According to Tom Essaye, of Sevens Report Research, tonight’s rate cut is much less important than the steer the Fed gives over future rate cutting:
Bottom line, whether the Fed delivers a [quarter or half a percentage point] rate cut today is less important than the guidance provided on future cuts as the market wants to see the framework laid out for a fairly aggressive rate cutting path in the months ahead to shore up soft-landing hopes.
So projections and [Fed chairman Jerome] Powell’s speech will be critical for the market reaction late in the session [tonight’s trading on Wall Street].
04:29 PM BST
US stock prices will do well from rate cuts
US stock prices are expected to get a boost from interest rate cuts. But the increase could be limited because US stock prices have already been heavily bid up, an economist has suggested.
Daniel Grosvenor, director of equity strategy at Oxford Economics, said:
We think equities will fare well as the Federal Reserve begins to ease policy against a backdrop of resilient economic activity.
However, the upside is likely to be more modest than previous soft-landing episodes as headline valuations are stretched.
04:26 PM BST
FTSE pushing downwards amid market nerves
The FTSE has been falling throughout trading today as traders await news from the US. The FTSE 100 is down 0.7pc, while the FTSE 250 has dropped 0.6pc.
Across the Pond, the S&P 500 and Nasdaq are down 0.1pc, while the Dow Jones is down 0.2pc.
On the Continent, Germany’s Dax is down 0.1pc and France’s Cac 40 is down 0.5pc.
04:18 PM BST
Bond yields rise after traders take ‘unbalanced’ view of rate cuts
Bond yields have been rising today as traders waver over whether they have been overconfident over the scale of rate cuts.
Benchmark US 10-year Treasury notes have risen to 3.69pc from 3.66pc late on Tuesday.
UK 10-year gilts rose to 3.86pc from 3.77pc last night.
The euro zone benchmark, Germany’s 10-year government bond, is 2.20pc, up from 2.15pc yesterday.
George Catrambone, head of fixed income at DWS Americas, told Bloomberg:
The Fed is going to have to strike some balance here. This is a market that is unbalanced with respect to the amount of rate cuts that they’re pricing in.
04:09 PM BST
‘A lot of money will be made and lost today’, says Deutsche Bank
Wall Street’s main stock indexes are broadly flat this afternoon, while the dollar weakened, as traders weighed up the odds that the Federal Reserve’s expected decision to cut interest rates for the first time in more than four years could be a supersized move.
Financial markets are fully pricing in a quarter-percentage point rate cut, while the odds of a more unusual half-point cut stood at 63pc, according to LSEG data, up from as little as 14pc a week ago.
A Deutsche Bank analyst said in a note:
Given the uncertainty that’s still looming, we can expect a decent market reaction whatever the decision is.
You’d have to go back over 15 years to find such an uncertain situation this close to the decision. A lot of money will be made and lost today.
The Dow Jones Industrial Average is down by 0.2pc, the S&P 500 is flat and the Nasdaq Composite is up 0.1pc.
04:05 PM BST
Britain will stall as America cuts rates, claims think tank
Britain could be left behind while America’s economy gets a boost from rate cuts, according to a free-market think tank.
Maxwell Marlow, research director of the Adam Smith Institute, told The Telegraph:
This [tonight’s expected US rate cut] will have significant consequences for global growth.
US financial firepower will be bolstered by this rate cut, allowing companies and individuals to borrow more cheaply, and thus creating a higher amount of consumer spending.
This will spill over to the UK, where the Bank of England is expected to hold as we continue to battle inflation. We will see more companies look to the US for finance, while the UK is left behind, and our GDP growth stalls as a result.
03:56 PM BST
Fed decision ‘could provoke a good bit of trading volatility’
Analysts are predicting a singificant market reaction to tonight’s rate decision.
Patrick O’Hare, an analyst at Briefing.com, said:
The rate decision could provoke a good bit of trading volatility in its wake.
Debate over the past weeks has been on whether the US central bank will cut by a quarter or half point after the country’s inflation rate sharply cooled, with CME’s FedWatch Tool now ascribing about a 60 percent probability of a half point cut.
The argument against a larger cut is that it could spook markets by signalling that the Fed is worried about the state of the economy, while a smaller cut could disappoint investors who think the Fed has been too cautious in the face of signs of a slowing US economy.
03:48 PM BST
Markets too confident about the number of rate cuts
Traders are betting on US interest rates being cut by a full percentage point by the end of the year.
But Daniel Ivascyn of investment giant Pimco believes that the markets are going too far.
Bloomberg reported that Mr Ivascyn, who manages the $163bn (£123bn) Pimco Income Fund, said:
We do think that the markets may be getting a little bit ahead of themselves in terms of near-term cuts.
Over the course of the next few months there are some risks of reaccelerating inflation, which may lead to less cuts than are priced into the market.
03:41 PM BST
Pound hits two-year high ahead of ‘pivotal’ US interest rate decision
The value of the pound has surged to its highest in two years ahead of the Federal Reserve’s next decision on interest rates.
Sterling has risen 0.6pc today against the dollar to $1.323, which it has not reached since March 2022.
It comes as policymakers in the US are expected to cut borrowing costs for the first time in four years.
Money markets indicating there is a 66pc chance that this will be by an outsized half a percentage point from the present range of 5.25pc to 5.5pc, where interest rates have stood since July last year.
Meanwhile, the Bank of England is widely expected to keep interest rates unchanged at 5pc on Thursday, after services inflation rose from 5.2pc to 5.6pc in August.
David Morrison, senior market analyst at Trade Nation, said the meeting is “likely to trigger some market turbulence”.
He said: “It’s extremely rare to go into a Fed meeting with this amount of uncertainty. This is extremely unfortunate given the pivotal nature of tonight’s decision.”
Deutsche Bank analyst Jim Reid said: “You’d have to go back over 15 years to find such an uncertain situation this close to the decision. A lot of money will be made and lost today.”
03:37 PM BST
Wall Street dips as market awaits interest rate decision
The S&P 500 and Dow Jones Industrial average are slighly down this afternoon as markets await this evening’s interest rate announcement. The tech-heavy Nasdaq is very slighly up.
Adam Vettese, market analyst at investment platform eToro, said:
While the days of surprise moves from the Fed are long gone, in lieu of a communication policy of almost total transparency, an unusual level of uncertainty surrounds this latest policy meeting.
Though a cut of some kind is almost universally expected, there is some debate to be had over how large a move the Fed might make to try and support the economy.
Given the Fed’s propensity for following the data, the most likely scenario is a more conservative [quarter percentage point] cut.
A larger move, while bold, could potentially spark second guessing about what exactly the Fed knows that worries them enough to take such a strong move.
Either way, volatility could be on the cards when the decision becomes public this evening.
03:31 PM BST
Federal Reserve expected to cut interest rates
Welcome to our live updates on the US Federal Reserve’s latest monetary policy meeting, in which it is expected to cut interest rates for the first time in four years.
We are expecting the decision to be announced at 7pm UK time (2pm Eastern) with a press conference held by chairman Jerome Powell about half an hour later.
