US Federal Reserve begins two-day meeting likely to result in first rate cut since March 2020

The US Federal Reserve began a two-day interest rate discussion on Tuesday that is all-but-certain to end with its first cut since March 2020, as inflation continues to ease.

The meeting began at 10:30 am local time in Washington, the US central bank announced in a statement. The Fed’s rate decision will be announced on Wednesday afternoon local time.

Policymakers are widely expected to debate whether to choose a small cut of a quarter of a percentage point, or to make an aggressive half point reduction to the Fed’s benchmark lending rate.

The Fed goes into the meeting in an enviable position, with US inflation easing towards its long-term target of two percent, and a resilient-yet-cooling labor market.

Economic growth also remains positive, despite the squeeze in borrowing costs for consumers and businesses because of the Fed’s decision to hold its key lending rate at a two-decade high since July last year.

The data raises hopes that the Fed can achieve the rare feat of bringing inflation back down to target without triggering a recession – known as a “soft landing.”

A rate cut of any size would support US consumers, who are feeling the effect of interest rates at a 23-year high of between 5.25 and 5.50 percent, impacting the cost of borrowing on everything from mortgages to car loans.

While a larger cut would do more to push down the cost of borrowing, it also runs the risk of reigniting inflation – and Fed policymakers are unlikely to support it, according to KPMG chief economist Diane Swonk.

“A larger, one-half percent cut will no doubt be discussed during the meeting, but Fed Chairman Jay Powell is unlikely to have the votes to get a half percent cut in September over the finish line,” she wrote in a recent note to clients.

“Either way, we still expect to see a full one percent of cuts prior to year-end, which means at least one outsized cut in September, November or December,” she added.

The futures markets price in a probability of around 65 percent that the Fed will announce a half point cut on Wednesday, according to data from CME Group.