Fresh data this Friday confirmed that inflation is progressively subsiding, providing policymakers of Federal Reserve the liberty to reduce interest rates for the first time in the upcoming month. Their attention is now on protecting the labour market from further downturn.
The Commerce Department reported matched earnings in their Personal Consumption Expenditures (PCE) price index, which increased by 2.5 percent from the previous year in July, the same as in June. However, recent quarterly figures show that the Federal Reserve’s favoured measure of inflation is beneath its 2 percent target.
Federal Reserve Chairman Jerome Powell announced last week, much to everyone’s surprise, that the time was ripe for a rate cut. This comes after a strenuous fight with an inflation rate that hadn’t been this high in decades, pressurizing the central bank to take drastic measures to uplift rates in 2022 and 2023. A policy rate of 5.25 to 5.50 percent has been maintained since the previous July.
Ben Ayers, Nationwide’s senior economist, wrote that the latest price trends indicate that the conclusion of the Federal Reserve’s battle with inflation is near, guaranteeing a rate cut at the policy meeting from 17th to 18th September.
A slight increase in bets that the Federal Reserve will initially limit itself to a reduction of a quarter-percentage-point and introduce a more significant half-percentage-point cut in the subsequent meeting followed the report. The Federal Reserve is expected to lower rates by a complete percentage point by the end of the current year.
The unemployment rate has gone up almost a whole percentage point, rising to 4.3 percent, since rates ceased to be lifted a bit over a year ago. This noticeable change was enough for Powell to confirm that any further weaknesses will not be supported by the Federal Reserve.
Investors and the Federal Reserve are now eagerly awaiting the stock of critical data next week. This includes the release next Friday of US government’s report on employment for August.
The Federal Reserve’s ‘Beige Book’ will also publish anecdotes from national surveys and interviews. Policymakers of the central bank have claimed this gives a more contemporaneous perspective on the state of the economy. – Reuters
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