(Washington) The American central bank (Fed) is preparing to lower its rates for the first time since 2020 at its meeting to be held on Tuesday and Wednesday, sounding the death knell for the episode of high inflation that the United States has experienced over the last three years.
“The long-awaited Fed rate cut is finally coming,” said Nancy Vanden Houten, an economist at Oxford Economics.
The intentions of the American Federal Reserve are no secret: its chairman, Jerome Powell, had announced them at the end of August. “The time has come,” he had declared.
This drop will be the first since 2020 and the brutal impact of COVID-19 on the American economy. Rates were then quickly brought back to zero, to support economic activity.
PHOTO SUSAN WALSH, ASSOCIATED PRESS ARCHIVES
Jerome Powell, Chairman of the US Federal Reserve
But two years later, faced with soaring inflation, they had to be raised gradually in order to contain an overheating economy. Since July 2023, rates have been in the range of 5.25 to 5.50%, the highest in two decades.
This high level increases the cost of credit. If maintained for too long, it risks increasing unemployment or even causing a recession.
“The question is no longer whether they will reduce [les taux] or not, but by how much,” said Alicia Modestino, professor of economics at Northeastern University in Boston and previously an economist at the Boston Fed.
A quarter or half a point?
Will Fed officials opt for a moderate quarter-percentage-point cut or will they strike a big blow, with a half-point cut straight up?
The forecasts are tight among market participants, but the balance is slightly tilted towards a quarter point, according to CME Group’s forecasts.
“The labor market is cooling without collapsing, the consumer remains resilient and inflation is slowing, but it is probably too early to declare that the mission is accomplished,” summarizes Nancy Vanden Houten.
“The Fed is now more concerned about the labor market, but inflation remains important,” she noted. Recent data “have been slightly disappointing and show that inflation still has a long way to go before reaching the 2% target,” considered healthy for the economy.
Inflation, which has been weighing on the purchasing power of American households since 2021, is gradually coming back into line. The Fed’s preferred index, the PCE, remained stable in July, at 2.5% over one year, and the August data will be published on September 27.
The CPI index fell to 2.5% in August year-on-year from 2.9% in July, its lowest level since February 2021. But the underlying measure – which excludes energy and food – rebounded month-on-month.
The White House, for its part, assured on Wednesday that the country was turning “the page on inflation.”
“Not yet in the danger zone”
Alicia Modestino also expects only a “small drop.” Because “the other side of the picture, obviously, is employment,” with a “trend toward slowdown.”
But “we are not yet in the danger zone,” she stresses, “so there is no justification for a significant variation in interest rates now.”
Moreover, according to Gregory Daco, chief economist at EY, who also expects a quarter-point cut, “a larger cut would amount to an implicit admission that the Fed made a mistake in not easing policy in July.”
The European Central Bank (ECB), which had launched the movement in June, lowered its rates again on Thursday, by a quarter of a point.
On Tuesday and Wednesday, Fed officials will say how far they plan to cut rates and update their forecasts for inflation, GDP and unemployment.
The Fed meeting will also be the last before the November 5 US election, which will pit former Republican President Donald Trump against Democratic Vice President Kamala Harris.