Key Points
- A rate cut by the US Federal Reserve on Thursday morning is being seen as a near certainty.
- Federal Reserve chair Jerome Powell said last month that "the time has come" to cut rates.
- US investor Anthony Scaramucci is worried there could a be recession in the US if the Fed doesn't act quickly.
The US Federal Reserve — commonly referred to as 'the Fed' — is widely considered to be the world's most powerful central bank. Its decisions on interest rates influence the cost of money globally.
The Fed led global after inflation surged globally following massive coronavirus stimulus spending.
The benchmark US rate of 5.25 per cent to 5.5 per cent has slowed the US economy and dramatically lowered inflation back towards the Fed's target of 2 per cent.
A rate cut by the US central bank on Thursday morning is seen as a near certainty due to remarks by Federal Reserve chair Jerome Powell last month.
Powell said he would not want to see any further cooling in the labour market, and "the time has come" to cut rates.
"The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks," he said.
The market is expecting either a quarter of a percentage point cut (0.25 per cent) or a half a percentage point reduction (0.50 per cent), according to US rates forecaster CME Fed Watch.
Veteran Fed watcher and market strategist at GSFM Funds Management Stephen Miller said Powell made it clear that the US central bank plans to lower the cost of borrowing at this week's meeting.
"Powell's language was unequivocal, asserting "the time has come for policy to adjust," Miller wrote in a recent investment note.
How much will the Fed cut rates by?
To quote English poet William Shakespeare's tragic prince Hamlet: "That is the question."
Former Donald Trump adviser and US investor Anthony Scaramucci is predicting a big rate cut and a total of three rate reductions by the end of the year.
In a , the man known as 'the Mooch', said the Fed has waited too long to cut official interest rates.
"I think those of us that are in the world of finance and on Wall Street think that the Fed is behind the curve, so I'd like to see a 75-basis point (0.75 per cent) cut from the Fed.
"They'll likely cut 25 basis points (0.25 per cent), but I do think you'll get to at least three cuts this year before the end of the year, which I think will be important for the global economy and for the US."
National Australia Bank (NAB) investment strategist Gemma Dale said the slowing jobs market in the US could see the Fed make a supersized cut of 0.5 per cent.
"The market is very clearly pricing in cuts, and they've been flagged very explicitly by not just Jerome Powell, but other governors of the Fed, which has given the market a great deal of comfort that we know something is coming."
"We have seen quite significant revisions and clearly a massive deterioration in the labour market over the last three months."
But BetaShares chief economist David Bassanese thinks a large rate cut would freak out the markets.
"The question is whether they go by 25 (basis) points or 50. I think it will be only 25."
"The (US) economy is still holding up okay. I think fear of recession is overdone. And importantly, they don't want to scare the horses."
Will a rate cut avert a US recession?
Maybe, maybe not according to Scaramucci, who runs US hedge fund SkyBridge Capital.
The Mooch is worried there could a be recession in the US if the Fed doesn't act quickly.
"I do think that there is now a risk of a US recession.
"I think if they cut rates dramatically enough and deeply enough over the next six months, you could avoid a recession."
Bassanese disagrees.
"My judgment is they (the Fed) haven't been behind the curve."
"Inflation is still above target. It hasn't come back to the 2 per cent (Fed's inflation target) level yet."
"At this set stage, I think the economy has been holding up okay, and they're getting the timing pretty well."
What does the RBA Governor say about Australian interest rates?
The Reserve Bank of Australia (RBA) is under also pressure to cut rates as
Twelve rate rises since May 2022 have seen official rates jump from a record low of 0.1 per cent to a 13-year high of 4.35 per cent.
And that has dramatically slowed down inflation and the economy.
But RBA Governor Michele Bullock says annual inflation — which is currently running at around 3.8 per cent — is still too high, so interest rates also need to stay high to dampen spending.
And the RBA boss says don't expect any rate cuts for the rest of the year.
"What we can say is that a near-term reduction in the cash rate doesn't align with the board's current thinking," she said at a press conference after last month's RBA board meeting where rates were kept on hold.
Despite what the RBA boss says, some market watchers like Stephen Miller think the board's hand will be forced sooner rather than later.
He is predicting a Melbourne Cup Day rate cut on the first Tuesday in November.
NAB's Gemma Dale is of a different mind.
She doesn't see an RBA rate reduction until May next year — unless the Australian economy starts to unravel.
"The Australian economy is holding up okay; it's not fantastic, we're in a per capita recession, but it's not contracting.
"At this point in time, NAB's expecting the first cut in May next year, but the risk is always to the nearer term if things start to really fall apart."
And the ASX's RBA Rate Tracker — published at the end of each trading day — on Monday forecast a quarter of a percentage point rate cut in February 2025, and three more in the lead-up to August
With additional reporting by Reuters.
