US Fed declares inflation rate steady as rate cuts appear imminent

Have Wall Street’s prayers been answered at long last? The Federal Reserve announced today that inflation has held at 2.5 per cent over the year to July.

This comes in lower than the 2.8 per cent path forecast by Fed officials in June. The better-than-anticipated figures solidify expectations that rate cuts will begin in mid-September.

Today’s inflation data complements Fed Chairman Jerome Powell’s dovish Jackson Hole speech last week in which he asserted that the “time has come” for interest rate policy adjustments. Alongside falling inflation, Powell cited cooling labour market figures, wage gain moderation, and steady economic growth as rationales for the long-deferred pivot.

Many analysts now believe that either a 0.25 or even a 0.5 per cent cut from the current, 23-year-high, fed-funds rate of 5.25-5.5 per cent is “all but certain”. Nearly two years of erroneous rate-cut predictions have left investors wary, but Wall Street seems to believe this is the real deal as the Dow hit a record high yesterday and the S&P continues to inch upwards.

Others are not convinced that inflation is gone for good, and contest the Fed’s chosen metric. The 2.5 per cent measurement of “core” PCE excludes food and energy prices due to their presumed volatility, and thus fails to account for where most Americans are feeling the greatest strain.

American food price rises have been especially contentious, and Kamala Harris has even floated price controls to tackle the “gouging”. While sceptical of the efficacy of such a proposal, the problem is very real. Paying $17 for chips and salsa upon my return to Colorado was jarring, to say the least. 

In recent weeks, Donald Trump has joined the opponents to rate-cuts, warning Powell not to cut rates before the election. Convenient timing for a man who has railed against high rates for years, but now stands to suffer electorally from an improved post-cut market.

Trump also wants to reign in the independence of the Fed, recently insisting that he should “have a say” over monetary policy upon a second term. Powell was actually appointed by Trump in 2016 after the dismissal of Janet Yellen, who he claimed was a partisan Obama plant. In years since, the apolitical Powell has ruffled Donald’s feathers, and in 2019, Trump even put him on a par with Xi Jinping as one of the biggest “enemies of America”.

Central bank independence has become a staple across developed democracies in the last few decades to insulate nations from politically motivated runaway inflation. The UK’s own Gordon Brown separated Britain’s central bank from political reach back in 1997. Trump could revert this trend, putting a loyalist in the top Fed spot to ensure low rates for his term, perhaps, at great cost to the nation’s future.