Because as inflation gradually falls back into line, it is now time to prevent unemployment from rising in turn. And therefore to start lowering rates, which weigh on economic activity. These had been raised to curb the surge in prices, and have been in the range of 5.25 to 5.50% since July 2023, their highest level in more than 20 years. This start of rate cuts “has been clearly signaled by Fed Chairman (Jerome) Powell and others” officials, commented Lauren Saidel-Baker, economist for the consulting firm ITR Economics, in a note. “The only question now is the magnitude” of this reduction, she adds. The Fed will publish its decision via a press release at 2 p.m. local time (6 p.m. GMT), then Jerome Powell will hold a press conference thirty minutes later.
Double mission. Fed officials could err on the side of caution, to avoid reviving inflation, and opt for a modest quarter-point cut (25 basis points). Or, concerned about a rapid deterioration in the U.S. jobs market and economy, they could strike harder, cutting a full half-point (50 basis points). The latter option is now favored by two-thirds of market participants, with only one-third considering a modest cut, according to CME Group’s assessment.
Krishna Guha, an economist at investment firm Evercore, is counting on a half-point directly, which the Fed would present as “a starting 50 (…), and not as the first in a series” of cuts of the same magnitude. However, he does not rule out a quarter-point cut, “given the inertia of the Committee, with many preferring a gradual approach.” For Greg Daco, chief economist at EY, it is precisely this “progressive nature (that) will prevail” among the members of the Fed’s Monetary Policy Committee (FOMC). He therefore expects a cut of only a quarter of a point. Whatever the decision, the employment situation, which Fed officials have put aside in recent years because the labor market was doing so well, is returning to the heart of their concerns. The mission of the powerful American Federal Reserve is in fact twofold: to ensure price stability and full employment.
Last meeting. “I have rebalanced my focus on both sides of the dual mandate for the first time since early 2021,” Atlanta Fed President Raphael Bostic, who this year has rotating voting rights on the FOMC, said in early September. Inflation is gradually getting back on track: the PCE index, which the Fed wants to bring down to 2%, was stable in July at 2.5% over a year. The August data will be published on September 27. The CPI index fell in August to its lowest level since February 2021, 2.5% over a year. As for the unemployment rate, it fell in August, to 4.2%, but job creation is slowing.
“The most important thing about this meeting is that the rate cuts are finally starting,” said Lauren Saidel-Baker. Fed officials will also update their forecasts for the U.S. economy on Wednesday, including inflation, GDP and unemployment. They will also say how far they plan to cut rates. This will be their last meeting before the Nov. 5 U.S. election, which pits former Republican President Donald Trump against Democratic Vice President Kamala Harris. The next one will be held immediately after the election, on Nov. 6-7.
Julie CHABANAS
© Agence France-Presse
