IT IS “hard to imagine” the Federal Reserve not cutting interest rates next month, a senior bank official said on Monday (Aug 26), in the latest signal that many policymakers favour a cut.
The Fed hiked its key lending rate to a two-decade high last year as it battled to control runaway inflation after the Covid-19 pandemic and return towards its long-term 2 per cent target.
Although inflation remains slightly above target, the cooling US labour market has led many Fed policymakers to conclude that its dual mandate to tackle both inflation and unemployment has now come into better balance, paving the way for a first cut.
“The direction of change is down, and the time to adjust is now,” San Francisco Fed president Mary Daly said in an interview with Bloomberg News on Monday.
It is “hard to imagine” not cutting interest rates in September, she added, in one of the firmest signs yet that officials intend to start cutting at the next Fed rate decision.
Daly’s comments come a few days after Fed chair Jerome Powell said “the time has come” to start cutting interest rates, setting the stage for a September start.
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The Fed’s decision to hold its benchmark lending rate at a 23-year high of between 5.25 and 5.50 per cent has cooled down the world’s largest economy, and kept the cost of borrowing high for businesses and consumers alike.
If the Fed moves ahead with a rate cut in September, it will thrust the independent US central bank into the spotlight just ahead of November’s presidential election. But the Fed has long insisted that the timing and size of any cuts will be dictated by the data, not politics.
Traders overwhelmingly expect the Fed to move ahead with a rate cut in September. But there is less clarity on how much the Fed will cut in September, or what the pace of cuts will be thereafter.
The data do not currently point to “any warning signs of weakness” in the labour market, Daly told Bloomberg on Monday, adding that the “most likely” scenario going forward was a gradual slowdown in inflation, and steady and sustainable growth in the labour market.
“If those things happen, then adjusting policy at the regular, normal cadence seems reasonable,” she noted in response to a question about whether she favoured a 25 or a 50 basis point cut.
“If we should see deterioration or any signs of weakness, then being more aggressive to ensure that we don’t see that, it would be appropriate,” she added. AFP
