The US Central Bank, the Federal Reserve (The Fed), may signal a rate cut this week, although the cut is expected to be delayed until the next interest rate decision in September.
Fed officials, who acknowledged they moved too slowly to stem surging inflation in 2021 and 2022, are wary of cutting rates too quickly, which could inadvertently reignite inflation.
“The Fed, as a group, doesn’t want to be seen as letting inflation run back up or stay above their target,” EY chief economist Gregory Daco told AFP news agency.
“There is definitely a tendency for that, considering this has happened before.”
Most analysts and trader not convinced the Fed will start lowering interest rates in July, even though recent data suggests inflation continues to slow toward the Fed's long-run target of 2%, while U.S. economic growth remains strong and the labor market is increasingly balanced.
“It’s clear that disinflation is underway,” said Citi’s global chief economist, Nathan Sheets. “And that’s very encouraging for the Fed.” But the central bank “still has time to start the cutting cycle,” he added.
One More Break
The Fed has kept its main lending rate in its current range, between 5.25% and 5.50%, for the past year as it seeks to dampen demand in the country and push inflation back to its target.
Higher interest rates make borrowing more expensive for consumers and businesses, which in turn drives up costs for everything from car payments to mortgages.
As data moves in line with expectations, Fed Chair Jerome Powell could use the July meeting to prepare his plan for a September rate cut and reinforce his message at a keynote address at the global central bankers' meeting in Jackson Hole, Wyoming, next month, Citi reported.
While most analysts currently expect the first interest rate cut to come in September, there are still a number of analysts who are expressing caution about the US economy.
“The Fed is optimistic that a cut is likely in the near term, but we do not believe the Fed will signal that it will in September,” Bank of America economists wrote in a new note to clients. They still expect the first cut to come in December.
For trader Futures are now firmly convinced that the first rate cut will occur in mid-September, with a 100% probability that the Fed will cut rates by at least a quarter percentage point by then, according to data from the CME Group. (br/jm)
