Fed Expected to Cut Interest Rates Despite Skepticism

The Federal Reserve is set to make a highly anticipated decision on interest rates on Wednesday, with futures market traders betting on a near certainty of a quarter percentage point cut in the benchmark overnight borrowing rate. A cut would take the benchmark rate down to its target range of 4.25% to 4.5%. However, some analysts question the timing of a cut, citing stubbornly high inflation and a strong economy.

Fed officials are split on the decision, with some arguing that policy does not need to be as restrictive in the current environment and that a cut would aid the economy. Former Kansas City Fed President Esther George has expressed skepticism, stating she would not cut rates this week. In contrast, some Fed officials support a cut, citing the need for looser monetary policy. The Federal Reserve is expected to lower the policy rate, with the target range potentially dropping to 4.25-4.50%. A downward revision to the end-2025 interest-rate projection in the Summary of Economic Projections (SEP), or dot plot, could indicate a dovish tilt in policy outlook.

Fed Chairman Powell's comments after the decision will be crucial in determining the market's reaction. The USD's valuation could see significant movement, with a hawkish tone potentially leading to a rally in the USD and a dovish tone resulting in a EUR/USD pair rebound. Analysts at FXStreet note that EUR/USD remains technically bearish in the near term, with resistance levels at 1.0600 and 1.0800. The market will closely watch the decision and Powell's comments to gauge the direction of interest rates and the USD.

The market eagerly awaits Wednesday's decision, with the outcome expected to significantly influence the US economy and global markets. A September rate cut, according to some academics, could lead to a shift in how investors assess the Federal Reserve's predictions regarding interest rates for 2023 and 2024.