Federal Reserve's Dilemma: To Cut or Not To Cut Interest Rates?

The U.S. job market downturn has spurred speculation that the Federal Reserve might cut interest rates before its scheduled September meeting. However, most analysts believe an early move is improbable, with emphasis on employment and price stability. Past rate cuts were triggered by major market upheavals, from the 2008 financial crisis to the COVID-19 pandemic.

A sharp slowdown in the U.S. job market has triggered days of global stock-market turmoil and fueled speculation that the Federal Reserve may cut interest rates before its scheduled September meeting.

Interest rate futures, which reflect Fed policy expectations, surged to a two-month high earlier this week as investors bet on a rate cut by the end of August. Despite this, Chicago Fed President Austan Goolsbee emphasized that the Fed's mandate focuses on employment and price stability, not the stock market.

Most analysts now expect a half-percentage-point rate cut at the September meeting, but believe an earlier move is unlikely. Nationwide economist Kathy Bostjancic warned that an emergency rate cut could spark further panic in the markets. Fed Chair Jerome Powell is expected to discuss potential policy directions at the Kansas City Fed's economic symposium later this month.

Future economic data on jobs, inflation, consumer spending, and growth will influence the size of any rate cut. Historically, intermeeting rate cuts have occurred during significant market upheavals, such as the 1998 Russian financial crisis, the 2001 tech stock crash, the 2008 global financial crisis, and the 2020 COVID-19 pandemic.

(With inputs from agencies.)