Why Uncertainty Still Hangs Over the Fed’s Rate Decision

DealBook|Why Uncertainty Still Hangs Over the Fed’s Big Decision

Split decision

There is little suspense on Wednesday on whether the Fed will make its first interest-rate cut in four years. But even in these final hours before the central bank announces its highly anticipated move, the debate is still raging about how deep the central bank will go.

One near certainty is that the decision will reverberate on the presidential campaign trail, giving a potential boost to the Harris-Walz campaign and spurring anger from Donald Trump.

Traders on Wednesday were doubling down on their go-big bet. The futures market was giving roughly 69 percent odds that the central bank would cut its prime lending rate by a 0.5 percentage-point. That call has risen steadily as concerns have grown about the fragility of the labor market in recent weeks.

Most economists are in the go-slower camp. They point to an economy that’s losing steam — though not at risk of falling into recession — and inflation that’s easing but still high as reasons for a more cautious quarter-point decrease. Doomers also note that the last three times the Fed cut by more than that — in 2001, 2007 and in 2020 — the economy was in rough shape, and soon afterward sank into a recession.

Politicians are at the extreme ends of the debate. Some progressive Democrats, including Senator Elizabeth Warren of Massachusetts, have urged Jay Powell and his colleagues to cut by 75 basis points. Trump has made his views clear, too: He thinks the Fed should hold off until after Election Day, assuming a cut could help the Democrats.

The Fed faces a tall task whatever it decides. Go big, and the takeaway would be that the economy is hurting. Go smaller, and “the key risk will be convincing market participants that they are not behind the curve,” Josh Hirt, an economist at Vanguard, wrote in a preview note on Tuesday.