The Federal Reserve may signal this week that rate cuts are on the way — though it is widely expected to remain on hold until the next rate decision in September.
Fed officials, who admitted they moved too slowly to stem an inflationary boom in 2021 and 2022, were wary of cutting rates too soon and accidentally rekindling inflation.
“The Fed as a group does not want to be seen as having allowed inflation to pick up again, or that inflation remains persistently above its target,” EY chief economist Gregory Dako told AFP. “There is definitely a backburn bias.”
Most analysts and traders do not expect the Fed to start cutting interest rates in July, even with recent data showing inflation continues to slow toward the U.S. central bank’s long-term target of 2 percent while economic growth remains strong and the job market is coming. in better balance.
Russia’s central bank raises key interest rates to fight inflation
“Clearly the ongoing process of deflation is happening,” Citi chief economist Nathan Setz told AFP. “And that’s very encouraging for the Fed.”
However, the US central bank “still has time to start its cycle of cuts,” he added.
Another pause
The Fed has kept its key lending rate in the current range of between 5.25% and 5.50% over the past year as it sought to reduce demand in the world’s largest economy and bring inflation back on target.
Higher interest rates make borrowing more expensive for consumers and businesses, indirectly raising the cost of everything from car loans to mortgages.
With the data now moving steadily in the right direction, Fed Chairman Jerome Powell may use the July meeting to lay the groundwork for a rate cut in September and reinforce his message during a keynote address in a gathering of the world’s central bankers in Jackson Hole. Wyoming, next month, according to Sheets from Citi.
Asian markets are struggling to recover from the tech disaster after the US data
While most analysts now broadly expect the first rate cut to come in September, there are still some who are taking a more cautious view of the US economy.
“The Fed is optimistic that cuts are likely in the near term, but we don’t think it is willing to signal that September is over,” Bank of America economists wrote in a recent note to clients, adding that they still expect the first cut to come. only in December.
Futures investors are now all but convinced that the first rate cut will happen by mid-September, giving a 100 percent chance that the Fed will have cut rates by at least a quarter of a percentage point by then, according to CME Group data.
Cuts and elections
A rate cut in September would push the independent US central bank into the middle of a heated and divisive presidential campaign between Vice President Kamala Harris and former President Donald Trump.
American Airlines reports lower profits, but gains on IT disruptions
Trump has repeatedly criticized Powell, whom he nominated, and has suggested he would not want to reappoint him as Fed chairman if he is re-elected president in November.
For his part, Powell insisted the Fed is taking a data-driven approach to rate cuts that doesn’t take political considerations into account.
However, “the realities of the political situation mean that if they are cut, if the cycle starts in September, it is likely to get some political attention,” Citi’s Sheets said.
Assuming the Fed makes its first rate cut in September, most analysts expect policymakers to make at least one more rate cut before the end of the year — possibly in December.
While most analysts expect at least two cuts this year, Fed policymakers recently moved to just one rate cut for 2024, down from three in March, after several months of higher inflation reports earlier in the year.
Source: AFP