There was no doubt that The US Federal Reserve (Fed) was set to make its first rate cut since March 2020The unknown was whether the reduction would be 25 or 50 basis points. Finally, the institution chose the second option, leaving the reference rates in a range between 4.75% and 5%.
In March 2020, the institution had to suddenly reduce the price of the currency by 100 basis points to reach Protecting the US economy from Covid-19. This Wednesday’s change of half a percentage point is also out of the ordinary, while Fears grow that the United States is entering a recession.
Additionally, Fed members forecast interest rates to end the year at 4.4%, implying a further 50 basis point cut before the end of the year. Central Bank to rule on benchmark rates again November 7 and December 18.
In the statement released after the meeting, members of the Fed’s Federal Open Market Committee (FOMC) explained that monetary policymakers have “gained greater confidence that inflation is moving sustainably towards 2%”” and consider that “the risks to achieving their employment and inflation objectives are roughly balanced.”
“In view of the progress in terms of inflation and the balance of risks”, and despite the fact that “the economic outlook is uncertainThe Committee decided to reduce interest rates by 50 basis points.” The decision was not taken unanimously. One of its members, Michelle W. Bowman, voted in favor of a 25 basis point cut.
Regardless, “in considering further adjustments to the target range for the federal funds rate, the Committee will carefully evaluate the data received, the evolution of the outlook and the balance of risks.
Fed members say they are ready »adjust the monetary policy stance where appropriate if risks arise which could prevent the achievement of its objectives.
Inflation and employment
US Monetary Policy Eases After Benchmark Rates having reached the maximums of the last 23 yearsranging from 5.25% to 5.5%. They have remained unchanged over the past 14 months.
The drop comes at a time when the market fears that US enters recessionas Inflation slows and the labor market coolsIn this scenario, the central bank’s own toughness would also have had a negative impact on the world’s largest economy.
In August, The U.S. consumer price index (CPI) moderated to 2.5%compared to 2.9% in July. These are minimums since February 2021.
In monthly comparison, i.e. August compared to July, the price increase remained at 0.2%.
For its part, the underlying rate – which excludes energy and food from the calculation – also did not register any change, so it remained at 3.2%, the lowest mark since April 2021. The same rate, but in monthly comparison, increased by a tenth, to 0.3%.
The tameness of inflation – despite the resilience of the underlying indicator – and signs of cooling in the labor market have increased fears of a skid in the U.S. economy. So, the market was positioning itself in favor of a 50 basis point cut like the one that finally took place.
At the same timeThe US unemployment rate fell by a tenth to 4.2%Excluding agriculture, the U.S. economy added 142,000 jobs in August, some acceleration from July’s figures.
However, the country’s administration Job creation revised down in Julyreducing it by 25,000 jobs to 89,000. It also eliminated new jobs June up to 118,000, or 61,000 less than in the first reading.
This is not the only downward revision. A month ago, the government reduces job creation recorded between March 2023 and April 2024During these twelve months, the world’s largest economy generated 2.1 million jobs, 818,000 fewer than initially expected.
“Although labor market conditions have clearly softened and inflation has continued to move toward the 2% target,” Ebury analysts see “no signs of mass layoffs or a recession in the United States.”
Recession?
The Fed itself does not see it that way, having stepped out of its comfort zone. –movements of 25 basis points- to opt for a cut of half a percentage point. And this, even if this decision could be interpreted as a sign that the American economy is in a more delicate situation than expected.
Historically, investors have viewed large moves as a sign that The Fed must know something it doesn’t know. In particular, it has been interpreted as a sign that the US economy is in worse shape than it appears.
More rate cuts
At the last meeting of each quarter—such as the one that just took place—FOMC members express their expectations for the path of short- and medium-term interest rates. These expectations are reflected in the one known as a dot plot or point plot.
On this occasion, monetary policymakers expect interest rates to end 2024 at 4.4%. In this way, The planned rate cut for the rest of the year is 50 basis points. In June, central bankers were only anticipating a 25 basis point cut this year and an end to rates at 5.1%.
FOMC members also updated their forecasts for the next two years. Specifically, they expect benchmark rates to be at 3.4% by the end of 2025 And? stands at 2.9% at the end of 2026Three months ago, they expected interest rates to end next year at 4.1% and the year after that at 3.1%.
In addition to updating their interest rate forecasts, Fed members revised their economic estimates. In this case, monetary policymakers have revised downward their growth and inflation forecasts.
Less growth, more unemployment
The central bank is hoping that US grows 2% in 2024, a tenth less than in June. Similarly, it predicts an expansion of another 2% in 2025 and 2026. This is the same forecast as three months ago.
In this macroeconomic scenario, The Fed moderated its estimate of inflation for this year, placing it at 2.3%, three tenths less than expected in June. In addition, the members of the institution moderated their forecast for 2025, from 2.3% to 2.1%, and maintained that of 2026 at 2%.
Monetary policy makers their expectations about the labor market have deteriorated. In this way, they now believe that Unemployment rate to close 2024 at 4.4%four tenths more than in its previous forecast.
Similarly, they expect it to remain at 4.4% at the end of 2025 and moderate to 4.3% at the end of 2026.
