Global Rate-Cutting Cycle Picks Up Speed — Evening Brief – 08.01.24
The Federal Reserve’s delay in lowering interest rates appears to have had little impact on global central banks’ own easing measures. While the Fed moved closer to cutting interest rates on Wednesday, most likely deferring until September, the Bank of England (BOE) joined the cycle, along with the Bank of Canada, Swiss National Bank (the first developed markets’ central bank to do so), European Central Bank and Sweden’s Riksbank in becoming the latest central bank to adopt a more accommodative policy stance, cutting its benchmark interest rate from 5.25%, its highest level in 16 years, to 5%.
Meanwhile, the Reserve Bank of New Zealand left its cash rate unchanged at 5.5% at its July meeting but hinted at a future cut if inflation slows. The Reserve Bank of Australia’s next action is expected to be a decrease in rates. However, the Bank of Japan appears to be heading in the opposite direction, having raised its key policy rate on Wednesday.
Like the other central banks, the BOE took a cautious approach to future changes in borrowing costs, with the minutes stating that officials will “decide the appropriate degree of monetary policy restrictiveness at each meeting.” Even yet, the Bank’s predictions indicate a sharper path to interest rate cuts over the next three years than markets presently anticipate.
Although the Federal Reserve kept its benchmark interest rate steady on Wednesday, as predicted, Fed Chair Jay Powell stated that the “time is drawing near” for the central bank to begin lowering interest rates. That might happen as soon as the Fed’s next policy meeting in September, if economic indicators continue to suggest decreasing inflation, he said.
The time for a rate cut “is approaching, and if we do get the data we hope we get, then reduction of our policy rate could be on the table at our September meeting,” Powell told reporters at the press conference.
“Quite balanced, and nicely captures the moderation in inflation and the real side without fueling the flames of adding a November cut too,” Derek Tang, economist with LH Meyer/Monetary Policy Analytics told Bloomberg. “A September easing should still be a go, barring anything that would stay their hand.”
Some experts continue to foresee a series of interest rate cuts in 2024, which they predict will start with the September meeting. “I expect multiple rate cuts beginning in September,” Bryan Jordan, Chief Strategist at Cycle Framework Insights, Inc., told Connect Money. “There have been at least three rate cuts in every easing cycle over the last half-century, and the Fed itself expects nine moves by the end of 2026.”
The nation’s labor market, which appears to be withering, is a significant source of concern. Job growth has slowed to an average of 177,000 each month over the last three months, compared to a three-month average of 275,000 last year.
“The U.S. economy is still healthy on balance, but it is slowing. The effects of the rate hikes in 2022 and 2023 are beginning to show up in the data, added Jordan. “The labor market is also cooling, as job growth has moderated, and the jobless rate has started to climb.”
Furthermore, the unemployment rate rose to 4.1% in June, from a 50-year low of 3.4% in 2023. A softening employment market was obvious in a Labor Department report released Wednesday, which showed companies’ labor costs increasing more slowly. Wages and benefits increased by 4.1% in the year ended June 30, compared to 4.5% the previous year.
“There have been only three occasions outside of recessions historically in which the unemployment rate has risen by more than the 0.7 percentage point increase in this cycle. A soft landing remains possible, but it is no longer the most likely scenario,” explained Jordan.
Rate cuts by many of the major central banks are likely to have reinforced the start of the monetary policy normalization process, and evidence of easing in the US job market and weaker inflationary pressures have likely given the Fed cause to join the rate-cutting effort.