One of the year’s most keenly awaited events is set to strike this week as the US Federal Open Market Committee meets on September 18 and probably delineates some new contours in monetary policy that shape the lives of all of us.
So, what can we expect from this much-anticipated event? Well, for starters, the Fed is widely expected to announce its first interest rate cut since 2020, with many analysts predicting a reduction of 25 to 50 basis points. The current benchmark rate sits between 5.25% and 5.50%, and this cut would mark a significant turning point in the Fed’s monetary policy, which has been in place to combat inflation that surged post-pandemic.
Interest Rates: The Big Question
It is equally expected that the Fed will also consider key economic indicators. Elusive sunshine of inflation cooled; of late it reached 2.5%, after peaking at over 9% in mid-2022. The softening of the labour market has also been witnessed where unemployment crept up to 4.2%. Thus, if this economic growth is slow and unsustainable, policymakers are caught in a high-risk trade-off between stimulating more growth and inciting inflation again.
What about the stock market?
Now I know what you’re all thinking: “But what is going to happen with the stock market? What is going to happen to my investments?” Haha. The stock market has been on quite a rollercoaster ride lately, but I do believe that it will stabilize soon. It may want to now provide an absolutely much-needed relief for the banking sector coupled with the stock market in general. But this market already is pricing in a 59% chance of a 25-bps cut and a 41% chance of a 50-bps reduction.
How will this affect us?
But enough on that big-picture stuff. Let’s discuss what this means to you and me—the average Joe and Jane. Now coming at it with an individualist viewpoint, if you have a credit card or a variable-rate loan, then your monthly payment should fall a hair’s breadth. If you are in the market to purchase a house or car, perhaps this is the time to take the plunge. This means lower interest rates result in better loan conditions and lower monthly payments.
There are savings account rates. Fed cuts are unlikely anytime soon to boost savings account rates, but it should prompt even more competitive offers for banks looking to attract depositors. So, if some spare cash is floating around, you could consider high-yield savings accounts or certificates of deposit before they start falling.
The Risks Involved
However, with all major economic events, there is associated risk. Some untold consequences may arise out of the Fed’s decision, and thus one needs to be appropriately informed and take decisions pertinent to his or her personal finance scenario. The Fed is walking a tightrope as it tries to balance control over inflation against growth in the economy. In case the inflation does not soften as expected, then we might see a change of tack from them sooner than later.
What’s Next?
Then the Fed meeting agenda, which is going to discuss a SEP on their expectations of the outlooks for basic economic indicators. To investors, attention should be placed upon the speed at which further cuts might occur, as Fed Chair Jerome Powell indicated in the press conference to follow, and more importantly, the look of the economy.
The whole world has therefore to pay keen attention to its moves since, basically, the decisions reached by the Fed tend to be mirrored in other World Central Banks. Due to the complexities of the US world economy, little change in the monetary policy of the US will cause ripples that could feasibly shake the world global markets from something as mundane as the valuation of currency to strategic investments.
Disclaimer: This content is for educational purposes only and is not financial advice. Consult a qualified financial advisor before making any investment decisions.
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