The path is clearly clear for a reduction in the official interest rates of the US Federal Reserve (FED). Annual inflation fell to 2.5% in August, according to figures published by the Ministry of Labor on Wednesday, September 11. This is its lowest level since February 2021. “Today’s report shows that we are turning the page on inflation”Lael Brainard, economic adviser to President Joe Biden, rejoices, while price increases peaked at 9.1% in June 2022. Excluding energy and food, the increase remains at 3.2%, a slightly worse figure than expected. This is due to housing prices – rent and purchase – which remain high after the post-Covid-19 price increase and that of mortgage loans.
Month to month, the trend is similar, with an overall price increase of 0.2 points. This very correct figure should be reflected in the employment figures, since the mission of the Federal Reserve is twofold: to guarantee price stability and to promote full employment. But the labour market is cooling off rapidly. Thus, in August, the country created only 142,000 jobs, after a bad month of July (89,000). Conclusion: it is time to loosen the grip on the national economy.
Markets are debating whether the Federal Reserve will cut rates, currently set above 5.25% – a record since 2006 – by a quarter or half point after its policy committee meeting on Wednesday 18 September. Many arguments are in favour of a measured reduction of a quarter point: first, the decline in inflation remains fragile; then, a half-point drop could cause panic in the markets – attesting that a recession is looming and that the Fed is a battle behind – but also accentuate economic pessimism, as the Fed works, for years, to be predictable.
Mixed signals
Moreover, this is the institution’s last meeting before the presidential elections in November, and its chairman, Jerome Powell, should not be suspected of leading partisan politics. Donald Trump accused him in recent months of wanting to lower rates to help the Democrats and explained that he wanted, if he returned to the White House, to have a say in setting monetary policy. Slowness and serenity: this is the price of independence that should lead the Federal Reserve to favour a cautious move. “A 50 basis point rate cut is probably no longer on the agenda”writes Christophe Boucher, Chief Investment Officer at ABN Amro.
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