The Federal Reserve is indicating that a cooling labour market is alleviating inflationary pressures, but there is likely significant reluctance to implement cuts swiftly, primarily due to the upcoming US presidential election, predicts the CEO of one of the world’s largest independent financial advisory and asset management organisations.
The prediction from deVere Group CEO Nigel Green comes as June’s US consumer price index (CPI) data revealed a rise of 3% from the previous year, falling short of the expected 3.1%. Core prices, which strip out volatile food and energy costs, rose by 3.3%, slightly under the forecasted 3.4%.
He comments: “This marginal decline in inflation, combined with Federal Reserve Chair Jerome Powell's recent congressional testimony, has spurred market speculation about faster rate cuts from the Fed.
“The inflation figures suggests that the central bank’s stringent monetary policies are yielding results. As inflation cools, the urgency to maintain high interest rates diminishes, making a case for cuts to stimulate economic growth.
“Beyond the CPI, other economic indicators, such as unemployment rates and consumer spending, suggest that the economy may not need the high-interest environment for much longer. A cooling labour market, as pointed out by Powell, means fewer wage pressures and, consequently, reduced inflationary risks.”
Global economic conditions also play a role. Slowing growth in major economies like China and Europe could dampen demand, further easing inflationary pressures in the US. In response, the Fed might opt to cut rates to pre-emptively support the domestic economy.
The deVere CEO continues: “Despite the market's anticipation, there is significant reluctance to implement these cuts swiftly, primarily due to the upcoming US presidential election.
“The Fed always strives to remain apolitical and avoid actions that could be construed as favouring one political outcome over another. A rate cut in September, so close to the election, could be seen as an attempt to influence the political landscape by boosting economic sentiment.”
Powell addressed this concern directly, emphasising that rate decisions will be made “when and as” they are necessary rather than being timed for political convenience. This statement underscores the Fed's commitment to its dual mandate- controlling inflation and maximising employment – irrespective of political pressures.
The Fed faces a delicate balancing act. On one hand, economic indicators suggest that a rate cut could be beneficial. On the other, the proximity to the presidential election complicates the timing.
The Fed must weigh the economic benefits of a rate cut against the potential perception of political bias. Powell’s comments suggest a careful approach, prioritising economic indicators over political timelines.
Financial markets are highly sensitive to Fed signals. Speculation about rate cuts has already influenced market behaviour, with investors adjusting their portfolios in anticipation. The Fed's measured approach aims to prevent market overreactions that could destabilise the economy.
Nigel Green concludes: “The market’s expectation of faster Fed rate cuts is rooted in today’s positive inflation data and broader economic indicators.
“But the upcoming US presidential election adds a layer of complexity to the timing of these cuts as Chair Jerome Powell focuses on the delicate balance between economic necessity and political neutrality.”
