How is it going with the interest rates?
Donald Trump states that the US Federal Reserve will lower interest rates after the election, but central bankers may ignore this request.
A topic generating much discussion at financial markets is the monetary policy of the US Federal Reserve (Fed). On Wednesday, the Fed decision-makers will determine further monetary policy - it is expected that they will not lower interest rates yet, but many experts anticipate that the hawks among the Fed, such as Chairman Jerome Powell, will at least send a clear signal for a forthcoming monetary policy turnaround lower.
This is long-awaited by financial markets. Commerzbank economist Bernd Weidensteiner expects a clear signal: "The Fed will seize the opportunity to prepare market participants for a rate cut announcement with the communique and Powell's press conference."
To combat high inflation, the Fed raised the benchmark interest rate from nearly zero to a range of 5.25% to 5.50% since early 2022. The Fed has been on pause since then. With decreasing inflation, the time for the turnaround could be near. In a recent Reuters survey, 82 out of 100 surveyed economists forecasted a first step down by 0.25 percentage points for the September 18th meeting. The Fed would then follow the European Central Bank's (ECB) lead, which initiated the turnaround in June and could follow up with another easing step on September 12.
Recent signals from the Fed's leadership have indicated a rate cut. According to Fed Governor Christopher Waller, the timing for such a move is getting closer. The Federal Reserve, however, is not yet at its goal. Waller assumes that the time for a rate cut is approaching, as his colleague Adriana Kugler agrees. She referred to progress in the fight against inflation. Consumer prices in the US rose less significantly in June than in May (3.0% vs. 3.3% in May and 3.4% in April).
US Economy Strong
Recent data support the theory that inflation is declining. This is evident in a basket of goods, which is tailored to the personal consumption of US consumers and closely monitored by the Fed. The so-called PCE Index grew by only 2.5% in June, as experts had anticipated, compared to a rate of 2.6% in May.
The Fed aims to curb inflation without stifling the economy. Its resistance is impressive, according to economist Dirk Chlench of Landesbank Baden-Württemberg, despite the Federal Reserve's high-interest-rate policy. The US economy has more than doubled its growth rate in the first half of the year. The Gross Domestic Product (GDP) grew by 2.8% between April and June on an annualized basis, up from a 1.4% increase at the beginning of the year.
The strength of the economy is also a political issue in the year of the US Presidential election. According to US Treasury Secretary Janet Yellen, the high growth rates of the economy are not a coincidence but are related to the policy of US President Joe Biden. Since his inauguration, 15.7 million jobs have been created. The data on GDP and inflation in the second quarter confirmed that the US is on track. The likely Democratic presidential candidate, Kamala Harris, would continue the core policies of the Biden administration, according to Yellen.
Harris' Rival, the Republican US Presidential candidate Donald Trump, has urged the independent central bank to postpone a rate hike before the November elections. The background: Lower interest rates generally stimulate the economy and relieve consumers - Trump does not want this to happen during Biden's tenure.
However, as Fed Chairman Powell recently emphasized, political considerations play no role in the Fed's monetary policy during a US Presidential election year. The Fed focuses solely on its mandate - that is, securing price stability and promoting full employment.
Robert Greif, CEO of Merck Finck, believes that the Fed will take the first step to lower interest rates in September and will not be dissuaded from this by Trump's warnings: "The Fed is doing well to begin its rate-cutting cycle a few weeks before the election – and then possibly make a second cut in December."
- Despite Donald Trump's request for the Federal Reserve (Fed) to lower interest rates after the election, analysts expect the Fed decision-makers, led by Chairman Jerome Powell, to maintain their current stance during their meeting on Wednesday.
- Contrary to Donald Trump's urging, the independent Fed is unlikely to postpone a potential rate hike before the upcoming US Presidential election, focusing instead on its mandate of securing price stability and promoting full employment.
- Analysts, such as Bernd Weidensteiner of Commerzbank, anticipate that the Fed will send a clear signal for a future monetary policy turnaround during their meeting, which could include a lowering of interest rates, despite any political pressures or requests.
