Consumer prices are rising more slowly
The Federal Reserve last lowered the key interest rate in March 2020 – to stimulate the economy in the early stages of the corona pandemic. After that, interest rates initially remained at zero – until the Fed began raising rates at a record pace in March 2022 and raised the interest rate to its current level a year ago. In the USA, price increases have recently weakened. This gives the Federal Reserve more room for maneuver to cut interest rates. The European Central Bank had already initiated the interest rate turnaround in June.
Consumer prices in the US rose by 2.5 percent in August compared to the same month last year. This is the lowest inflation rate since February 2021. The US Federal Reserve is aiming for an inflation rate of 2 percent in the medium term. The labor market has also weakened recently. For the Fed, the fight against high consumer prices is a balancing act. If interest rates are too high, there is a risk of a recession. If interest rates are cut too early, the inflation rate could rise again. In the summer of 2022, it was more than 9 percent.
The effects of interest rate cuts
Market observers assume that a rate cut will be the starting signal for further monetary easing by the Fed. However, the Fed’s monetary policy will only take effect after a delay – the central bankers will probably continue to keep a close eye on the inflation rate. The Fed will also publish its new economic data today, which will also provide an outlook on interest rate developments.
A reduction in interest rates makes loans cheaper, which means that companies can invest more easily and many citizens have to spend less on debt – they therefore have more income available. This could stimulate the economy. High returns for savers, on the other hand, could be reduced. Interest rate cuts are good news for US investors. A significant interest rate cut is likely to weaken the dollar further – travelers to the USA from Germany should be happy about this.
Big or small step
Recently, pressure has been growing on the Fed and its chairman, Jerome Powell, to tighten interest rates. However, a reduction in the key interest rate by 0.5 percentage points would be an unusual decision – the Fed actually prefers small interest rate increases of 0.25 percentage points.
Opponents of a loose monetary policy, however, say that interest rate cuts are not necessary at the moment given the robust US economy. In addition, the core inflation rate excluding energy and food remains at 3.2 percent. The US Federal Reserve pays particular attention to the core rate. Experts believe that it reflects the general price trend better than the overall rate.
