Fed Officials Signal Upcoming Interest Rate Cuts

Fed Officials Signal Upcoming Interest Rate Cuts

On August 17, two key policymakers of the U.S. Federal Reserve (Fed) expressed their support for cutting interest rates in the coming months. Despite opposition from former President Donald Trump, these Fed officials believe that recent economic data, which shows cooling inflation and weakening labor market signs, make the move appropriate.

Fed Governor Christopher Waller and New York Fed President John Williams both suggested that it would soon be suitable for the Fed to reduce interest rates. Waller, speaking in Kansas City, Missouri, stated, "While I don’t believe we have reached our final goal, I think we are getting closer to the point where cutting policy rates is appropriate."

Williams, in an interview with The Wall Street Journal, said that the inflation data from the past three months has brought the Fed closer to achieving the desired downward trend in inflation.

Since July last year, the Fed has kept the federal funds rate at 5.25-5.5%. Currently, investors expect the Fed to start lowering interest rates before the end of 2024, possibly as early as September, with a reduction of 0.25 percentage points. This expectation is based on the fact that U.S. inflation is gradually approaching the Fed's 2% target.

If this forecast comes true, the Fed will initiate the monetary policy easing cycle before the U.S. presidential election on November 5, 2024. However, Trump, in an interview with Bloomberg, warned the Fed against lowering rates before the election, saying, "It is something they know they shouldn't do."

Waller and Williams emphasized the need for more evidence of declining inflation before making a decision to cut rates. This is also the stance of Fed Chair Jerome Powell and other officials as of July. Therefore, the likelihood of the Fed cutting rates at the July meeting is very low.

According to analysts, the weakening labor market is the main reason to believe that the Fed is close to reducing interest rates. The U.S. labor market has been a significant source of inflationary pressure in recent years but has shown signs of weakening recently. In June, the unemployment rate rose to 4.1%, the highest since October 2021.

Waller noted, "Currently, I see the likelihood of the unemployment rate rising being at its highest in a long time." He added that the labor market is in good condition and expressed hope that this state will continue.

Williams stated that whenever the Fed begins to cut rates, it will do so gradually to balance the risks of high inflation and rapidly rising unemployment. "I truly believe that a decision lies ahead, not to withdraw from a tight monetary policy stance, but to reduce rates to lessen the policy's tightness," Williams said.

Before the Fed's September meeting, policymakers will have additional economic reports to evaluate, including two inflation reports and two employment reports. Waller indicated that he could foresee an interest rate cut "in the near future" if both inflation reports are favorable.

According to the latest data, the Consumer Price Index (CPI) in June rose by 3% year-on-year. The Personal Consumption Expenditures Price Index (PCE) - the measure the Fed uses for its 2% inflation target - increased by 2.6% in May. The PCE data for June will be released next Friday.

If inflation rises again, a possibility the International Monetary Fund (IMF) warned about this week, the Fed may have to delay its rate-cutting plans.