The Federal Reserve is gearing up to implement a gradual policy easing strategy in response to rising inflation concerns, according to a recent report from ratings agency Fitch. The easing cycle is expected to be relatively mild compared to historical standards, with the central bank anticipated to start cutting rates at its September policy meeting.
Fed’s Planned Rate Cuts
Fitch’s global economic outlook report for September forecasts a 25-basis-point cut at both the September and December meetings of the Federal Reserve. This will be followed by additional rate reductions of 125 basis points in 2025 and 75 basis points in 2026. In total, Fitch predicts a 250 basis points reduction in interest rates over a span of 10 moves across 25 months.
The report highlights that this gradual approach to policy easing is driven by the need to address ongoing inflationary pressures. Despite efforts to contain inflation, the Consumer Price Index (CPI) remains above the Fed’s target of 2%, indicating the need for further action to stabilize prices.
Inflation Trends and Challenges
Recent data from the Labor Department revealed that U.S. inflation in August dipped to its lowest level since February 2021. The consumer price index rose 2.5% year-on-year, falling below the 2.6% expected by analysts. Core CPI, which excludes volatile food and energy prices, increased by 0.3% for the month, slightly higher than estimates.
Fitch notes that the decline in core inflation rates, driven primarily by lower automobile prices, may not be sustained in the long term. This underscores the importance of a cautious and measured approach to monetary policy to address inflationary pressures effectively.
The report also acknowledges the challenges faced by the Federal Reserve in managing inflation over the past few years. Delays in taming inflation and gaps in understanding the drivers of inflation have prompted a more nuanced and deliberate strategy in implementing rate cuts.
Global Policy Trends
In the Asian region, Fitch anticipates continued rate cuts in China as deflationary pressures take hold. The People’s Bank of China surprised market participants with a rate cut in July, signaling a proactive stance to combat declining prices. Fitch expects further rate cuts in China over the next few years to stimulate economic growth and stabilize inflation rates.
Conversely, the Bank of Japan has adopted a more hawkish approach to monetary policy, raising rates to combat inflation and stimulate wage growth. With core inflation consistently above the BOJ’s target and positive signals from the labor market, the central bank is confident in its ability to sustain a “virtuous wage-price cycle” to support economic stability.
Fitch’s projections for the Bank of Japan’s policy rate indicate a gradual increase towards neutral settings, reflecting the central bank’s confidence in the economy’s strength. This divergence in policy approaches between China and Japan underscores the nuanced strategies required to navigate complex economic challenges.
In conclusion, the Federal Reserve’s planned policy easing, alongside global trends in monetary policy, highlights the importance of a strategic and measured approach to addressing inflationary pressures. By implementing gradual rate cuts and focusing on stabilizing prices, central banks can support economic growth while maintaining price stability in the face of evolving market conditions.
