The Federal Reserve on Wednesday, September 18, lowered its target for the fed funds rate by 50 basis points to 4.75%-5.00%, citing the importance of supporting American activity, as inflation returns to its 2% target and labor markets have normalized.
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Fed Chairman Jerome Powell at a news conference.Photo: AFP/VNA/CVN
“The upside risks to inflation are lower, and the risks to the labor markets are higher,” justified the president of the institution, Jerome Powell, during a press conference, insisting on the “patience” of the Fed, one of the last central banks in developed countries to ease its monetary policy.
However, Jerome Powell believes that the central bank is not behind the economy, estimating that this “recalibration will allow us to maintain the strength of the economy and labor markets”, close to full employment according to the leader.
The central bank’s decision could nevertheless raise questions about the signal sent to the American economy, because a rate cut of this magnitude could suggest that rapid easing is necessary to avoid stifling activity with overly restrictive rates.
“The time to support labor markets is when they are strong,” Powell said, adding that “we no longer need to see labor markets weaken further in order to bring inflation back to target.”
“I don’t see anything in the economy right now that suggests that the risks of a recession are elevated,” the Fed chairman said.
The central bank should therefore continue to ease its monetary policy, deciding meeting by meeting on the extent of a possible cut.
“We should not imagine that monetary easing will take place at a pace comparable to that of today,” the Fed chairman said.
“We are at an important moment: inflation and interest rates are falling, while the economy remains resilient,” commented US President Joe Biden, who is due to speak on Thursday, September 19, on American activity.
The rate cut is “good news for Americans who have suffered from high prices,” said US Vice President and Democratic presidential candidate Kamala Harris.
The decision on Wednesday, September 18, was taken unanimously, minus one vote, that of Governor Michelle Bowman, the central bank said. It is the first time that a member of the Fed’s monetary policy committee (FOMC) has opposed a decision since 2005.
Inflation declines
The Fed’s updated projections show that board members expect 50 basis points of additional easing this year, 100 basis points in 2025 and 50 basis points in 2026, and a terminal rate of 2.9% versus 2.8% expected in June.
The unemployment rate expected at the end of 2024 has been revised slightly upwards, to 4.4% against 4.0% previously seen.
The growth rate is revised downward for 2024, to 2.0% from 2.1% forecast in June, while the growth forecast for 2025 is maintained at 2%. Core PCE inflation is expected at 2.6% in 2024, from 2.8% expected in June, then 2.2% in 2025, from 2.3% previously forecast.
Observers believe that the Fed is, with its decision, reducing the risks of a downturn in activity.
“This dovish signal should ease market concerns that the central bank has been running late as cracks begin to appear in the U.S. labor market,” said James McCann, abrdn’s deputy chief economist.
Indeed, yields rose in the United States following the decision, with the 10-year yield hitting its highest since September 10 during the session, a sign that traders consider the risks of a sharp slowdown in the economy less likely.
“The priority is clear: to bring monetary policy closer to the neutral rate in order to limit the risks of recession,” adds James Knightley, chief economist for the United States at ING.
Money markets are now betting on a 70bp cut by December.
Economists polled by Reuters had overwhelmingly expected the central bank to cut rates by 25 basis points at its September meeting.
AFP/VNA/CVN
