Julian Marx (Flossbach von Storch) | The US Federal Reserve has just announced the second interest rate cut of the year. It is going down by 25 basis points to a new range of 4.5 to 4.75 per cent. The Fed’s confidence in today’s interest rate move may also have been drawn from the latest ‘Beige Book’, which is considered a barometer of the US economy and is published two weeks before the regular meetings of the Federal Open Market Committee.
On the one hand, it shows that the employment situation remains extremely robust. Fears that the situation on the labour market – and with it growth prospects – would rapidly deteriorate, which emerged over the summer, have not materialised so far. After rising to 4.3 per cent in July 2024, the US unemployment rate settled at a low four per cent in the following months. From the point of view of numerous companies, the fact that the availability of labour has gradually improved is positive, even though the search for skilled workers in some areas remains difficult.
The improved availability of labour is also directly linked to a positive reading for the inflation outlook. The somewhat more relaxed supply situation on the labour market does, however, point to a cooling of wage inflation. So the direction is right, even though average hourly wages in the US have recently still been rising by around four per cent – and thus remain slightly elevated by monetary policy standards. The Federal Reserve believes that wage growth in the range of 3 to 3.5 per cent is compatible with its existing inflation target. In addition to the developments in the labour market, the fact that the ongoing pressure on shelter prices should continue to normalise in the coming months is also positive on the inflation side. While shelter prices rose by around five per cent in the third quarter of 2024, the inflation rate for (leading) new rentals was only one per cent.
Conclusion
The Fed is currently right on track. Just over two years ago, probably very few observers would have thought it possible that historically high inflation rates of temporarily nine per cent could be reduced within a few years without causing visible collateral damage in the US economy at the same time. Yet this scenario still seems possible. With wage inflation and housing costs, there is currently much more to be said for a further easing than for a renewed flare-up. In this situation, the spectre of inflation is no longer keeping the US central bankers awake at night, even though core inflation (as measured by the PCE price index) remained above the inflation target at 2.7 per cent in the third quarter. In view of its dual mandate and its commitment to full employment, the Fed will therefore continue to try to reduce the restrictiveness of its monetary policy cautiously without jeopardising the successes already achieved in combating inflation. This path remains data-dependent, as Fed Chairman Powell emphasised again at today’s press conference.
P.S.: According to the Fed Chairman, the recent US elections will have no influence on the central bank’s policy in the short term. ‘We don’t speculate,’ Powell was very clear when asked about this by journalists. Without fiscal decisions, which understandably will only take shape in a few quarters when Trump is in office, this reaction seems all too understandable from the point of view of a data-dependent central bank.
