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<figure class="wp-block-image size-full"><img loading="lazy" decoding="async" width="1600" height="900" src="https://cms.cnbcafrica.com/wp-content/uploads/2024/09/108036147-1726687763293-gettyimages-2172944678-_m010185_bsbvoiyl.jpeg" alt="" class="wp-image-532393" srcset="https://cms.cnbcafrica.com/wp-content/uploads/2024/09/108036147-1726687763293-gettyimages-2172944678-_m010185_bsbvoiyl.jpeg 1600w, https://cms.cnbcafrica.com/wp-content/uploads/2024/09/108036147-1726687763293-gettyimages-2172944678-_m010185_bsbvoiyl-300x169.jpeg 300w, https://cms.cnbcafrica.com/wp-content/uploads/2024/09/108036147-1726687763293-gettyimages-2172944678-_m010185_bsbvoiyl-820x461.jpeg 820w, https://cms.cnbcafrica.com/wp-content/uploads/2024/09/108036147-1726687763293-gettyimages-2172944678-_m010185_bsbvoiyl-160x90.jpeg 160w, https://cms.cnbcafrica.com/wp-content/uploads/2024/09/108036147-1726687763293-gettyimages-2172944678-_m010185_bsbvoiyl-768x432.jpeg 768w, https://cms.cnbcafrica.com/wp-content/uploads/2024/09/108036147-1726687763293-gettyimages-2172944678-_m010185_bsbvoiyl-1536x864.jpeg 1536w" sizes="auto, (max-width: 1600px) 100vw, 1600px" /><figcaption class="wp-element-caption">Photo: via CNBC</figcaption></figure>



WASHINGTON – The Federal Reserve on Wednesday enacted its first interest rate cut since the early days of the Covid pandemic, slicing half a percentage point off benchmark rates in an effort to head off a slowdown in the labor market.



With both the jobs picture and inflation softening, the central bank’s Federal Open Market Committee chose to lower its key overnight borrowing rate by a half percentage point, or 50 basis points, affirming market expectations that had recently shifted from an outlook for a cut half that size.



Outside of the emergency rate reductions during Covid, the last time the FOMC cut by half a point was in 2008 during the global financial crisis.



The decision lowers the federal funds rate to a range between 4.75%-5%. While the rate sets short-term borrowing costs for banks, it spills over into multiple consumer products such as mortgages, auto loans and credit cards.



In addition to this reduction, the committee indicated through its “dot plot” the equivalent of 50 more basis points of cuts by the end of the year, close to market pricing. The matrix of individual officials’ expectations pointed to another full percentage point in cuts by the end of 2025 and a half point in 2026. In all, the dot plot shows the benchmark rate coming down about 2 percentage points beyond Wednesday’s move.



“The Committee has gained greater confidence that inflation is moving sustainably toward 2 percent, and judges that the risks to achieving its employment and inflation goals are roughly in balance,” the post-meeting statement said.



The decision to ease came “in light of progress on inflation and the balance of risks.” Notably, the FOMC vote was 11-1, with Governor Michelle Bowman preferring a quarter-point move. Bowman’s dissent was the first by a Fed governor since 2005, though a number of regional presidents have cast “no” votes during the period.



“We’re trying to achieve a situation where we restore price stability without the kind of painful increase in unemployment that has come sometimes with this inflation. That’s what we’re trying to do, and I think you could take today’s action as a sign of our strong commitment to achieve that goal,” Chair Jerome Powell said at a news conference following the decision.



Trading was volatile after the decision with the Dow Jones Industrial Average jumping as much as 375 points after it was released, before easing somewhat as investors digested the news and considered what it suggests about the state of the economy.



Stocks ended slightly lower on the day while Treasury yields bounced higher.



“This is not the beginning of a series of 50 basis point cuts. The market was thinking to itself, if you go 50, another 50 has a high likelihood. But I think [Powell] really dashed that idea to some extent,” said Tom Porcelli, chief U.S. economist at PGIM Fixed Income. “It’s not that he thinks that’s not going to happen, it’s that he’s not he’s not pre-committing to that to happen. That is the right call.”



The committee noted that “job gains have slowed and the unemployment rate has moved up but remains low.” FOMC officials raised their expected unemployment rate this year to 4.4%, from the 4% projection at the last update in June, and lowered the inflation outlook to 2.3% from 2.6% previous. On core inflation, the committee took down its projection to 2.6%, a 0.2 percentage point reduction from June.



The committee expects the long-run neutral rate to be around 2.9%, a level that has drifted higher as the Fed has struggled to get inflation down to 2%.



The decision comes despite most economic indicators looking fairly solid.



Gross domestic product has been rising steadily, and the Atlanta Fed is tracking 3% growth in the third quarter based on continuing strength in consumer spending. Moreover, the Fed chose to cut even though most gauges indicate inflation well ahead of the central bank’s 2% target. The Fed’s preferred measure shows inflation running around 2.5%, well below its peak but still higher than policymakers would like.



However, Powell and other policymakers in recent days have expressed concern about the labor market. While layoffs have shown little sign of rebounding, hiring has slowed significantly. In fact, the last time the monthly hiring rate was this low – 3.5% as a share of the labor force – the unemployment rate was above 6%.



At his news conference following the July meeting, Powell remarked that a 50 basis point cut was “not something we’re thinking about right now.”



For the moment, at least, the move helps settle a contentious debate over how forceful the Fed should have been with the initial move.



However, it sets the stage for future questions over how far the central bank should go before it stops cutting. There was a wide dispersion among members for where they see rates heading in future years.



Investors’ conviction on the move vacillated in the days leading up to the meeting. Over the past week, the odds had shifted to a half-point cut, with the probability for 50 basis points at 63% just before the decision coming down, according to the CME Group’s FedWatch gauge.



The Fed last reduced rates on March 16, 2020, part of an emergency response to an economic shutdown brought about by the spread of Covid-19. It began hiking in March 2022 as inflation was climbing to its highest level in more than 40 years, and last raised rates in July 2023.&nbsp;During the tightening campaign, the Fed raised rates 75 basis points four consecutive times.



The current jobless level is 4.2%, drifting higher over the past year though still at a level that would be considered full employment.



“This was an atypical big cut,” Porceli said. “We’re not knocking on recessions’ door. This easing and this bit cut is about recalibrating policy for the fact that inflation has slowed so much.”



With the Fed at the center of the global financial universe, Wednesday’s decision likely will reverberate among other central banks, several of whom already have started cutting. The factors that drove global inflation higher were related mainly to the pandemic – crippled international supply chains, outsized demand for goods over services, and an unprecedented influx of monetary and fiscal stimulus.



The Bank of England, European Central Bank and Canada’s central bank all have cut rates recently, though others awaited the Fed’s cue.



While the Fed approved the rate cut, it left in place a program in which it is slowly reducing the size of its bond holdings. The process, nicknamed “quantitative tightening,” has brought the Fed’s balance sheet down to $7.2 trillion, a reduction of about $1.7 trillion from its peak. The Fed is allowing up to $50 billion a month in maturing Treasurys and mortgage-backed securities to roll off each month, down from the initial $95 billion when QT started.

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<figure class="wp-block-image size-large"><img loading="lazy" decoding="async" width="820" height="547" src="https://cms.cnbcafrica.com/wp-content/uploads/2022/09/107094949-16589488462022-07-27t185755z_1401356456_rc2ikv9v3blg_rtrmadp_0_usa-fed-820x547.jpeg" alt="" class="wp-image-419969" srcset="https://cms.cnbcafrica.com/wp-content/uploads/2022/09/107094949-16589488462022-07-27t185755z_1401356456_rc2ikv9v3blg_rtrmadp_0_usa-fed-820x547.jpeg 820w, https://cms.cnbcafrica.com/wp-content/uploads/2022/09/107094949-16589488462022-07-27t185755z_1401356456_rc2ikv9v3blg_rtrmadp_0_usa-fed-300x200.jpeg 300w, https://cms.cnbcafrica.com/wp-content/uploads/2022/09/107094949-16589488462022-07-27t185755z_1401356456_rc2ikv9v3blg_rtrmadp_0_usa-fed-135x90.jpeg 135w, https://cms.cnbcafrica.com/wp-content/uploads/2022/09/107094949-16589488462022-07-27t185755z_1401356456_rc2ikv9v3blg_rtrmadp_0_usa-fed-768x512.jpeg 768w, https://cms.cnbcafrica.com/wp-content/uploads/2022/09/107094949-16589488462022-07-27t185755z_1401356456_rc2ikv9v3blg_rtrmadp_0_usa-fed-1536x1024.jpeg 1536w, https://cms.cnbcafrica.com/wp-content/uploads/2022/09/107094949-16589488462022-07-27t185755z_1401356456_rc2ikv9v3blg_rtrmadp_0_usa-fed-scaled.jpeg 2048w" sizes="auto, (max-width: 820px) 100vw, 820px" /><figcaption class="wp-element-caption">Federal Reserve Board Chairman Jerome Powell speaks during a news conference following a two-day meeting of the Federal Open Market Committee (FOMC) in Washington, July 27, 2022.
Elizabeth Frantz | Reuters</figcaption></figure>



The U.S. Federal Reserve is on Wednesday heading for its first interest rate cut since the onset of the Covid-19 pandemic — and despite the move being widely forecast, global investors are braced for impact.



The Fed is behind a swathe of its central bank peers, including those in the euro zone, the U.K., Canada, Mexico, Switzerland and Sweden, all of which have already cut rates.



Many of these policymakers stressed they were willing to move ahead of the Fed — usually seen as the global leader — in response to slowing growth and easing inflationary pressures at home.



However, some analysts have questioned how much further they could go before the Fed — the world’s biggest central bank by assets — followed suit, given the ripples its actions create.



<h2 class="wp-block-heading" id="h-global-impact"><a></a>Global impact</h2>



A key concern is the pressure interest rate differentials put on currencies.



Broadly speaking, higher rates attract more foreign investors seeking better returns, in turn boosting the value of the domestic currency.



This has been seen in the current cycle with the Japanese yen and Turkish lira taking a battering while their central banks kept rates low, while the U.S. dollar — as measured against a basket of currencies – soared throughout 2022 as the Fed delivered stringent rate hikes.



These differentials are particularly difficult for central banks attempting to keep price rises in check, since a weaker currency can be inflationary as it increases the cost of imported goods.



Beyond foreign exchange, another important effect of Federal Reserve rate-setting is its impact on the U.S. economy, particularly given the recent focus on a weakening labor market and possibility of a recession.



“As such an important driver of global growth, this is bound to have an effect on asset prices around the world,” Richard Carter, head of fixed interest research at Quilter Cheviot, said of a rate cut by the Fed.



That includes gold – which hit a record high this week on expectations of a move by the Fed. Higher rates are generally viewed to be a drag on gold since they make fixed-income investments, such as bonds, more attractive, although historically this has not always been the case. Gold is also used as a hedge against inflation (which can be pushed higher as rates go lower) and investors also buy the commodity in times of market stress.



Oil and other commodities, usually priced in dollars, often receive a boost with a rate cut as a lower cost of borrowing can stimulate an economy and increase demand.



Many emerging markets are more sensitive to these factors, making Fed moves even more important for them than bigger economies. Equity markets are also affected by moves by the Fed — and not just in the U.S.



Much of the global stock market volatility over recent months was linked to speculation over when, and by how much, the U.S. central bank will reduce rates.



“Interest rate cuts reduce the cost of borrowing in U.S. dollars, thereby creating easier liquidity conditions for companies around the world,” Quilter Cheviot’s Richard Carter continued via email.



“Lower U.S. interest rates should also lower the yield available on U.S. assets such as Treasurys, thus making other markets relatively more attractive,” he added.



<h2 class="wp-block-heading"><a></a>First cut the deepest?</h2>



While markets are confident that the Fed will kick off its cutting cycle on Wednesday, there is considerable uncertainty over how far and fast it will move over the remaining three meetings this year and into 2025.



That includes whether the initial cut will reduce the Fed funds rate by 25 basis points or 50 basis points below its current 525 to 550 range. Over the last week, market pricing for the larger “jumbo” cut has leapt from under 50% to nearly 70%, according to CME Group’s FedWatch tool.



 “Whatever the outcome, the markets will move,” Steven Bell, chief economist at Columbia Threadneedle, said in a Monday note.



“It is unusual for the Fed to leave the market guessing to this extent ahead of the meeting, especially so close to the U.S. presidential election. I can only presume that the committee itself is split,” Bell continued.



The November election has raised questions over the direction of U.S. fiscal policy, and how that could in turn impact inflation and monetary policy.



Joe Tuckey, head of foreign exchange analysis at Argentex, said that an initial 50 basis point rate cut by the Fed had historically “preceded some awful returns in equity markets,” notably in 2007 ahead of the Great Financial Crisis and in the early 2000s amid the tech bubble market rout.



“In essence, the need for a larger cut points toward growth concerns and economic trouble ahead,” Tuckey said.



However, Hani Redha, multi asset portfolio manager at PineBridge Investments, said it was “more critical” to look at pricing for more than 270 basis points worth of cuts through to the end of 2025.



“The economic data is still not decisive enough to give direction to the market,” Redha said, which was supporting defensive sectors.



“I think initially the reaction is going to be mixed, but probably equities can still hold up here until there’s a more decisive break in the economic data.”

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Federal Reserve officials head into their policy meeting Tuesday closer to their goal of low inflation, but how much they will ease back on interest rates remains an open question.



A week’s worth of inflation data showed that price pressures have eased substantially since their meteoric rise in 2021-22. One gauge of consumer prices showed 12-month inflation at its lowest since February 2021, while wholesale price measures indicated pipeline price increases are mostly under control.



Both readings were certainly enough to clear the way for an interest rate cut at the Federal Open Market Committee meeting, which concludes Wednesday with a rate decision and an updated forecast on where central bankers see things heading in the future.



“We got two more months of good inflation data” since the last Fed meeting, Claudia Sahm, chief economist for New Century Advisors, said in a CNBC interview Friday. “That’s what the Fed asked for.”



The question, though, turns now to how aggressively the Fed should act. Financial markets, which provide a guidepost on where the central bank is heading, were no help.



Futures markets for most of the past week had lasered in on a quarter percentage point, or 25 basis point, rate cut. However, that turned on Friday, with traders switching to an almost even chance of a either a 25- or a half point, or 50-basis point-reduction, according to the CME Group’s FedWatch tool.



Sahm is among those who think the Fed should go bigger.



The inflation data “on its own would have gotten us 25 next week, as it should, and will get us a whole string of cuts after that,” she said. “The federal funds rate has been over 5%, has been there for over a year to fight inflation. That fight is won. They need to start getting out of the way.”



That means, Sahm said, starting off with a 50 basis-point reduction as a way to put a floor under potential labor market decay.



“The labor market [since] last July has gotten weaker,” she said. “So there’s an aspect of just recalibrating. We got some more information. [Fed officials] need to kind of clean it up, do a 50 basis point cut and then be ready to do more.”



<h2 class="wp-block-heading" id="h-confidence-about-inflation"><a></a>Confidence about inflation</h2>



The inflation reports indicate that the battle to bring inflation back down to 2% isn’t exactly over, but things are at least moving in the right direction.



The all-items consumer price index nudged up just 0.2% in August, putting the full-year inflation rate at 2.5%. Excluding food and energy, core inflation stood at 3.2%, a good deal farther away from the Fed’s target.



However, most of the core strength has come from stubbornly high shelter costs, boosted by the Bureau of Labor Statistics’ byzantine “owners equivalent rent” measure that asks homeowners what they could get if they rented out their residence. The yardstick, which comprises about 27% of the total CPI weighting, rose 5.4% from a year ago.



Despite lingering pressures, consumer surveys indicate confidence that inflation has been subdued if not completely arrested. Respondents to a University of Michigan survey in September expected inflation to run at 2.7% over the next 12 months, the lowest reading since December 2020.



Taking all the various inflation dynamics into account, Fed Chair Jerome Powell said in late August that his “confidence has grown” that inflation is trending back to 2%.



That leaves employment. Powell said in the same speech, delivered at the Fed’s annual retreat in Jackson Hole, Wyoming, that the Fed does “not seek or welcome further cooling in labor market conditions.”



The Fed has two jobs — stable prices and a healthy job market — and the primary mission looks about to change.



“If Powell wants to deliver on his, ‘we want no further weakening, no further cooling,’ they are going to have to, like, really move here, because that cooling trend is well established,” Sahm said. “Until it is interrupted, we are going to continue to see payrolls drift down and [the] unemployment rate drift up.”



<h2 class="wp-block-heading" id="h-the-case-for-a-quarter"><a></a>The case for a quarter</h2>



To be sure, there’s considerable sentiment for the Fed to lower by just a quarter-point at next week’s meeting, reflecting that the central bank still has more work to do on inflation, and that it is not overly worried about the labor market or a broader economic cooling.



“That’s really the key that they need to kind of hone in on, which is that they are normalizing policy and not trying to provide accommodation for an economy that is really in trouble,” said Tom Simons, U.S. economist at Jefferies. “I think they’ve done a very good job of expressing that point of view so far.”



Even with the quarter-point move, which Simons forecasts, the Fed would have plenty of room to do more later.



Indeed, market pricing anticipates rates could come down by 1.25 percentage points by the end of 2024, an indication of some sense of urgency at bringing benchmark borrowing costs down from their highest levels — currently 5.25% to 5.50% — in more than 23 years.



“The whole reason why they’ve been so cautious about cutting is because they’re concerned that inflation is going to come back,” Simons said. “Now, they have more confidence based on data that suggested [inflation] isn’t coming back right now. But they do need to be very careful to monitor potentially changing dynamics.”

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The U.S. Federal Reserve’s easing cycle will be “mild” by historical standards when it starts cutting rates at its September policy meeting, ratings agency Fitch said in a note.



In its global economic outlook report for September, Fitch forecast 25-basis-point cut each at the central bank’s September and December meeting, before it slashes rates by 125 basis points in 2025 and 75 basis points in 2026.



This will add up to a total 250 basis points of cuts in 10 moves across 25 months, Fitch noted, adding that the median cut from peak rates to bottom in previous Fed easing cycles going up to the mid-1950s was 470 basis points, with a median duration of 8 months.



“One reason we expect Fed easing to proceed at a relatively gentle pace is that there is still work to do on inflation,” the report said.



This is because CPI inflation is still above the Fed’s stated inflation target of 2%.



Fitch also pointed out that the recent decline in the core inflation — which excludes prices of food and energy — rate mostly reflected the drop in automobile prices, which may not last.



U.S. inflation in August declined to its lowest level since February 2021, according to a Labor Department report Wednesday.



The consumer price index rose 2.5% year on year in August, coming in lower than the 2.6% expected by Dow Jones and hitting its lowest rate of increase in 3½ years. On a month-on-month basis, inflation rose 0.2% from July.



Core CPI, which excludes volatile food and energy prices, rose 0.3% for the month, slightly higher than the 0.2% estimate. The 12-month core inflation rate held at 3.2%, in line with the forecast.



Fitch also noted that “The inflation challenges faced by the Fed over the past three and a half years are also likely to engender caution among FOMC members. It took far longer than anticipated to tame inflation and gaps have been revealed in central banks’ understanding of what drives inflation.”



<h2 class="wp-block-heading" id="h-dovish-china-hawkish-japan"><a></a>Dovish China, hawkish Japan</h2>



In Asia, Fitch expects that rate cuts will continue in China, pointing out that the People’s Bank of China’s rate cut in July took market participants by surprise. The PBOC cut the 1-year MLF rate to 2.3% from 2.5% in July.



″[Expected] Fed rate cuts and the recent weakening of the US dollar has opened up some room for the PBOC to cut rates further,” the report said, adding that that deflationary pressures were becoming entrenched in China.



Fitch pointed out that “Producer prices, export prices and house prices are all falling and bond yields have been declining. Core CPI inflation has fallen to just 0.3% and we have lowered our CPI forecasts.”



It now expects China’s inflation rate to bet at 0.5% in 2024, down from 0.8% in its June outlook report.



The ratings agency forecast an additional 10 basis points of cuts in 2024, and another 20 basis points of cuts in 2025 for China.



On the other hand, Fitch noted that “The [Bank of Japan] is bucking the global trend of policy easing and hiked rates more aggressively than we had anticipated in July. This reflects its growing conviction that reflation is now firmly entrenched.”



With core inflation above the BOJ’s target for 23 straight months and companies prepared to grant “ongoing” and “sizable” wages, Fitch said that the situation was quite different from the “lost decade” in the 1990s when wages failed to grow amid persistent deflation.



This plays into the BOJ’s goal of a “virtuous wage-price cycle” — which boosts the BOJ’s confidence that it can continue to raise rates towards neutral settings.



Fitch expects the BOJ’s benchmark policy rate to reach 0.5% by the end of 2024 and 0.75% in 2025, adding “we expect the policy rate to reach 1% by end-2026, above consensus. A more hawkish BOJ could continue to have global ramifications.”

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Why WNBA Player Salaries Lag Despite The League’s Rising Popularity

Fed slashes interest rates by a half point, an aggressive start to its first easing campaign in four years

How Fed Rate Cuts Affect The Global Economy

Will Taobao in English be a hit in the West?

Exploding pagers target Hezbollah across Lebanon and Syria

What a Fed rate cut could mean for the world

Swim together or drown separately: Secretary-General Scotland on Commonwealth’s climate agenda

How Amazon Is Delivering Packages Faster With The Help Of Generative AI

We need to work together to tackle climate change, says Commonwealth Secretary-General

Why EU’s Tariffs Won’t Stop Chinese EVs

The Fed has the proof it wants that inflation is slowing, but the next move is still up in the air

Why ChatGPT Creator OpenAI Is Having A Make Or Break Moment

At what age should kids be allowed smartphones? The debate is raging

Why Americans Are Going Back to Chili’s

Federal Reserve will opt for slow policy easing as there’s ‘still work to do’ on inflation, Fitch says

Commerzbank shares up after UniCredit buys stake

Why Everyone Is Flocking To North Carolina’s Tech Hub

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