Analysts expect 25 bps interest rate cut as Fed meets today

Federal Reserve headquarters

Global markets are awaiting the outcome of the US Federal Reserve meeting today, Sept. 18, amid speculation of the first interest rate cut in more than two years.

The Fed began its tightening monetary policy in March 2022, raising interest rates by 25 basis points (bps) between 0.25% and 0.50%. Later, it accelerated the pace of hikes in the subsequent six meetings, bringing rates to 4.25% and 4.5% by the end of 2022.

In 2023, the Fed eased the pace of rate increases, raising rates four times and holding them steady four times to reach 5.25% and 5.5%, the highest in 23 years. In 2024, the Fed maintained interest rates in five consecutive meetings.

Analysts surveyed by Argaam expect the US Federal Reserve to cut interest rates between 25 and 50 bps.

Markets are pricing in a 50-bps cut, says Saad Al-Thaqfan

Saad Al-Thaqfan, a board member of the Saudi Economic Association, said that expectations are based on recent inflation and labor market data, which indicate the possibility of cutting interest rates by 25 to 50 bps in the next Fed meeting.

The markets tend to price a 50-bps cut, he stated, adding that this will positively affect financial markets due to its stimulating effect on economic activity.

He pointed out that cutting interest rates by 25 bps will have a “limited negative impact”, as financial markets have already priced a 50-bps cut.

Inflation risks persist, 25 bps cut most likely: BlackRock

Ben Powell, Chief Middle East and APAC Investment Strategist for BlackRock Investment Institute, said a 25 bps rate cut is the most likely, given the risk of persistent inflation.

The Fed is likely taking the view that the underlying economic activity is more resilient than markets currently expect, he said, adding that market fears of a recession are overrated.

"A 50 bps rate cut is still possible if the Fed sees that cooling job growth is a sign that it has fallen behind the curve," Powell pointed out.

“Or it could reason that, with pandemic-induced inflation now behind us, restrictive policy rates are no longer necessary and, therefore, it has the space to bring them rapidly to neutral,” he added.

The main problem with this approach is the belief that we are in a new regime where structural shifts, such as geopolitical changes and an aging population, are set to add global inflationary pressures, requiring higher interest rates than in the past, he explained.

Powell does not think the Fed has much room to cut rates before inflation picks up again.

“Regardless of whether the Fed cuts by 25 or 50bps, we could see a market reaction. If 25 basis points, it would be a notable hawkish move relative to current market pricing. Small cap and cyclical shares in particular have outperformed in recent days on hopes for 50 basis points,” he said.

Meanwhile, a 50 bps rate cut would be a lenient move compared to what is expected.

Sectors to benefit in Saudi market

Al-Thaqfan expects the interest rate reduction to be positive for the banking sector, especially those that provide real estate loans with fixed interest rates, as the decrease in the cost of financing would increase the net interest margin for banks as well as financing companies.

He pointed out that companies with high debts would see an improvement in their earnings as loan burden eases.

The cement sector would benefit from the increase in demand with the recovery of the construction sector.

Real estate investment traded (REIT) funds, which were affected by higher interest rates, may also see an improvement in their performance with a reduction, since they rely heavily on financing.

Moreover, Al-Thaqfan expects REITs, whose profits were affected by the rise in interest rates, would benefit, given the size of loans as a percentage of the funds’ assets.

The petrochemical sector, too, may witness a recovery due to the increase in demand for its products, following an expected economic improvement.

The Saudi Central Bank usually mirrors the interest rate moves of the US Federal Reserve, due to the riyal-dollar peg.