The Federal Reserve will cut interest rates for the first time since 2021 as US inflation drops steadily.
Inflation in the United States dropped more than expected in August, setting the stage for the first interest rate cut at the Federal Reserve meeting next week. At the moment, interest rates are at their 23-year high of 5.25%-5.5%.
The Consumer Price Index (CPI), considered the main gauge of headline inflation, increased by 2.5% year-on-year in August. That was less than the 2.6% expected by a Reuters poll of economists and down from 2.9% in July.
Month-on-month, inflation rose 0.2%, mostly caused by a 0.5% shelter price increase. The housing market is still the hottest sector in the American economy, with mortgage prices still unaffordable for many first-time homeowners.
On the other hand, energy prices dropped by over 10% in August compared to last year. The United States became the world’s largest producer of petrol to offset gas price increases caused by geopolitical tensions in Ukraine and the Middle East.
Core inflation, a measure excluding volatile food and energy prices, remained stable at 3.2% year-on-year, in line with market expectations.
“Disinflation is an imperfect journey but it’s certainly happening,” said Kristina Hooper, chief global market strategist at Invesco. Hooper confirmed her belief that a September cut is coming, saying it will reduce interest rates by 25 basis points.
Avoiding a recession
Since global markets had their worst day since the pandemic on August 5th, investors feared recession might be impending for the American economy.
However, Fed officials pointed to several factors contributing to the US economy’s resilience. Last week’s data showed the US added 142,000 jobs in August, up from 89,000 in July. GDP growth is estimated at 2.5% for 2024, incredibly strong for an economy that’s already the largest in the world.
The good economic outlook will likely lead the Fed to cut rates by 25 basis points instead of 50, a number markets would be more comfortable with.
“The economy is doing just fine and cutting interest rates too much too quickly runs the risk of another move higher in inflation,” said Torsten Slok, chief economist at Apollo.
August inflation and the rate cut will boost Kamala Harris’ election chances in the US presidential race. The Biden-Harris administration will be able to claim victory against inflation, which reached 9.2% at its peak in June 2022.
Pennsylvania, a crucial swing state that could decide the election’s outcome, experienced less inflation than the US’s average.
