Investors are all but certain the Federal Reserve will cut interest rates at its September meeting on Wednesday. But the question of by how much — 25 or 50 basis points — has been hotly debated. Wall Street Journal Chief Economics Commentator and Deputy Economics Editor Greg Ip lays out the case for a half-point cut on Asking for a Trend with Josh Lipton. "It all starts out by looking at where rates are now," Ip says, noting that the current target rate of 5.25%-5.50% is the highest in 20 years. Rates were initially pushed that high because of sticky, elevated inflation. But in recent months, inflation has cooled considerably. The Consumer Price Index retreated to a 2.5% annual increase in August, its lowest level since February 2021 and well within the Fed’s 2% target. "Rates just look too high right now for the economic circumstances we have now," says Ip, adding that a 50-point cut would "bring the stance of monetary policy back to something that looks a little bit more logical for the economy that we have today." A 50-basis-point rate cut is not without its risks. But Ip says a quarter-point cut brings more risk, specifically when it comes to the labor market. Recent payroll prints have pointed to steady cooling in the job market. But sudden weakness in the new few prints could sound alarm bells for a possible recession. "And if that happens and the Fed has only gone a quarter point, it’ll be obvious… that they’re behind the curve," says Ip, "and then they’re stuck in this catch-up situation of having to cut rates more aggressively."
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