The American central bank (Fed) lowered its rates on Wednesday, September 18, for the first time since 2020, hitting hard with a half-point drop, seen as a “beginning”, during the last meeting of the institution before the American presidential election on November 5. This rate cut should restore purchasing power to American households, stuck between high inflation and high cost of credit.
And, although the Fed is independent of political power, a month and a half before the duel between Democrat Kamala Harris and Republican Donald Trump, its decision could give a boost to Joe Biden’s current vice president and make the opposing camp grind its teeth. Kamala Harris hailed it as “good news for the American people” and Joe Biden spoke of an “important moment”. But for Donald Trump, this drastic rate cut shows either “that the economy is in very bad shape” or that Fed officials are “playing the politicians’ game”.
The president of the institution, Jerome Powell, however assured during his press conference that political considerations did not enter into his decisions: “We ask ourselves: what is the right thing to do for the people we serve? And that is what we do. […] Nothing else is discussed.”
Further cuts are expected
With the cut, the Fed’s rates are now in the 4.75% to 5.00% range. “This decision reflects our growing confidence that with an appropriate recalibration of our policy, the strength of the labor market can be maintained,” Powell said. The decision was not unanimous: one governor, Michelle Bowman, voted for a cut of only a quarter of a point.
Further cuts are expected, totalling another half-point by the end of 2024. Jerome Powell has indicated that this is the “beginning of a process” of changing monetary policy. Because now that inflation is gradually coming back into line, the Fed wants to prevent unemployment from rising in turn by lowering rates.
“The risks” related to the Fed’s two missions, full employment and price stability, are now “roughly balanced,” the monetary policy committee stressed in its press release. The employment situation had, in fact, been put aside in recent years by Fed officials as the American labor market was doing well. Despite this, Wall Street ended down on Wednesday, as some investors expected more, particularly for the coming months.
Independence
Fed officials also sounded more optimistic about the path of inflation than in June, when they last updated their economic forecasts. They now see it ending 2025 at 2.1%, down from 2.3% previously.
But they are more pessimistic about unemployment, which they expect to rise to 4.4% this year and next, compared to 4.0 and 4.2% previously forecast. Gross domestic product (GDP) growth for 2024 is expected at 2.0%, compared to 2.1% previously.
The PCE inflation index, which the Fed wants to bring down to 2%, remained stable in July, at 2.5% over a year. The CPI index fell in August to its lowest level since February 2021, at 2.5% over a year. The unemployment rate fell in August, to 4.2%, but job creation is slowing. On the other side of the Atlantic, the European Central Bank (ECB) had cut its rates last week, for the second time in three months.
Powell was also asked at the conference about comments made by Donald Trump, who has regularly talked about weakening the Fed’s independence and recently said the president should “at least” have a say in the Fed’s decisions.
“We are not at the service of any political representative, any political figure, any cause, any issue,” he replied, adding that “this is also how other central banks are organized. It is a good institutional arrangement that is good for the public.”