Will Fed get it right with size of expected rate cut?

Senior Business Correspondent The long-anticipated interest rate cut by the US Federal Reserve is almost upon us, and yet there is a sense of unease over whether the world's most influential central bank will get it right.

- Ovais Subhani

After months of near consensus that the Fed will start bringing rates down from their highest levels in decades with a modest quarter-percentage point cut, a growing number of economic experts now believe that a bigger half-percentage point cut will be needed to avoid a potential US recession.

Former Federal Reserve Bank of New York president William Dudley, speaking at a forum organised by The Bretton Woods Committee in Singapore on Sept 13, said there is a compelling case for a half-point rate cut given that the US unemployment rate has risen by 0.8 percentage point from its trough of 3.7 per cent in January 2023.

Expectations of the size of the first Fed rate cut have swung widely but the latest odds tracked by CME Group's FedWatch Tool on Sept 16 show that 57 per cent of Wall Street traders are forecasting a 50 basis-point cut, up from 50 per cent on Sept 13. The odds of a 25 basis-point cut slipped from 50 per cent to 43 per cent.

Goldman Sachs chief US economist David Mericle is in the 25-point camp, saying that "larger cuts have historically come in the context of an obvious crisis or at least a layoff spiral", which the United States is far from today.

But JP Morgan chief US economist Michael Feroli said in a research report last week: "We are sticking with our call that they (the Fed) will do the 'right thing' and cut 50 points."

Whatever the Fed decides on Sept 18 in Washington - which will be the early hours of Sept 19 here the consequences will be global, especially for export-driven Singapore.