USA: Fed considers rate cut in September, before unemployment rises

The American central bank (Fed) maintained its interest rates on Wednesday at their highest level in 20 years, but paved the way for a drop in September, now concerned about rising unemployment, not just inflation.

Federal Reserve officials on Wednesday decided to keep the institution's rates in the 5.25 to 5.50 percent range they have been in for the past year. The decision was unanimous.

“If conditions are right, the rate cut could come as early as the September meeting,” Fed Chairman Jerome Powell said at a news conference following a two-day meeting of the institution's monetary policy committee, the FOMC.

“The general feeling within the committee is that the economy is getting closer to the point where it would be appropriate to cut our rates,” he added.

This rate cut would be the first since March 2020, when the Covid-19 crisis abruptly shut down economic activity, prompting the Fed to reduce the cost of money to zero.

The Fed's key rate © AFP – Samuel BARBOSA

American businesses and consumers are longing to be able to borrow money cheaper again. Indeed, it is the evolution of the Fed's rates that determines the rates of loans granted by banks.

The FOMC said it was “mindful of the risks to both aspects of its mandate,” namely ensuring stable prices and full employment, its officials stressed in a statement, mentioning that the unemployment rate “remains low.”

These comments mark a clear shift, as in its previous statement, the FOMC only mentioned inflation risks.

The July unemployment rate in the United States will be published on Friday. It is expected to be stable compared to June, at 4.1%, with fewer job creations, however.

While the Fed is wary of starting to lower its rates too early, which risks causing a new surge in inflation, it is also careful not to do so too late, which could increase unemployment.

– “Significant” drop in inflation –

The Fed had raised its main policy rate to the current level, the highest since 2001, in order to slow economic activity to curb the high inflation that, in the United States as elsewhere in the world, had accompanied the post-Covid economic recovery.

This policy has borne fruit, and Jerome Powell hailed “a really significant drop in inflation”.

The Fed building in Washington, May 3, 2023 © AFP – SAUL LOEB

After a rebound in early 2024, the rise in consumer prices has, in fact, resumed its downward trajectory, towards the Fed's target of 2% per year. It fell in June to 2.5% over a year, according to the PCE index, the central bank's preferred measure.

At the end of August, the Fed will hold the annual central bankers' meeting in Jackson Hole, a resort in the mountains of Wyoming.

Jerome Powell usually gives a speech there, and could be more specific about the rate cut envisaged at the next meeting, on September 17 and 18.

This meeting will be all the more important because it will be the last before the American presidential election on November 5.

The Republican candidate for the White House, Donald Trump, had, last February, criticized the Fed – independent of political power – for wanting to lower its rates to help the Democrats win.

“We will never try to make decisions based on the outcome of an election that has not yet taken place,” Jerome Powell said Wednesday, stressing that any Fed decision “before, during or after the election will be based on data, outlook and the balance of risks, nothing else.”

“We never use our tools to support or oppose any political party, any political leader or any political outcome,” he assured.

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