The Federal Reserve Board is likely to cut interest rates at its Sept. 17-18 meeting — but experts from Virginia Tech agree that the adjustment will be small.
“I think the Fed wants to display independence, so I am pretty sure they will not give either political party a 'valid' reason for criticism,” said Vijay Singal, head of the finance department in Virginia Tech’s Pamplin College of Business.
It would be the first cut of the year in the U.S., but Singal believes it will still be just a quarter percent.
Inflation eclipsed 9% in June 2022 before declining to and remaining between 3-4% for a year starting in June 2023, then began to drop more toward the 2% target this summer. That wasn’t enough to trigger a cut in July, but as the intervening months have seen slower job growth than expected, consensus seems to be building around a cut this week.
Truist Emeritus Professor of Finance George Morgan agrees that a smaller cut is likely, also to prevent unexpected future backtracking.
“My fear is that inflation will tick up again next year and the Fed will then feel they have to raise rates just when everyone is expecting continuing cuts. Cutting too much now risks having to raise in 2025,” he said, “especially if they adhere to their stated policy of targeting 2% inflation on average.”
Singal says any surprises from the Federal Reserve Board will likely be rooted in a couple of upcoming announcements.
“There are only two numbers of note before the Fed decision: initial jobless claims this Thursday, or retail sales on Tuesday. The inflation numbers are not very important, unless they are very different, because inflation is already known to be trending downward,” he said.
A big reason there is so much attention attached to the Fed’s decision-making is that there is an entire Fed futures market that has built up around trying to predict the timing of interest rate adjustments. That means the Fed’s impact goes beyond just the numbers.
“There is another channel through which they have influence, and that’s by influencing how people think,” said economist David Bieri. “That’s why everyone is so glued to what is going to happen this week.”
It’s created a game of chicken, says Bieri, in which the Fed is trying not to be led into decisions just because the market expects them.
“They are not going to give you any clues as to how soon they’re going to do it,” said Bieri. “They will hint that — by now, because the labor markets are slowing down — cuts are coming.”
Bieri says the bigger story is not the cut itself, but how it reverberates through these markets and their expectations.
“Yes, short-term interest rates will have to come down,” said Bieri. “Whether they need to come down aggressively by December or mid-next year, in my humble opinion, doesn’t really matter a great deal. What’s going to be more interesting to watch is how the Fed is massaging these increasingly aggressive expectations, because people are pushing them in one direction.”
Taking a step back, Bieri questions how we’ve arrived at a place where much of the country’s — and world’s — economic health is tied to this indicator.
“On a macro scale, we’re having this conversation believing that the Fed is the only institution that can get us out of this mess, when in fact there would be political solutions in Congress that could help us get out,” he said. “But we have convinced ourselves at this point in history that a bunch of unelected officials are sages to tell us what’s going to happen in the future.”
About Singal
Vijay Singal is the Finance Department Head at the Pamplin College of Business and the J. Gray Ferguson Professor of Finance. His research has been featured on CNN-FN, National Public Radio, Bloomberg Radio, and in print media such as the Wall Street Journal, Barron’s, The Washington Post, the Chicago Tribune, the New York Times, Investor’s Business Daily, SmartMoney, Fortune, and Money. View Singal’s full bio.
About Morgan
George Morgan’s research revolves around the decisions regulators should make when faced with issues related to disciplining banks. His work has appeared in many reputable journals like The Journal of Finance. View Morgan’s full bio.
About Bieri
David Bieri is an associate professor in the School of Public and International Affairs and an associate professor of economics. He also holds an appointment in the Global Forum on Urban and Regional Resilience. View Bieri’s full bio.
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