Responding to the “inflation storm”, recently, the FED increased lending interest rates to the highest level in 23 years. This move has caused inflation to gradually decrease from its highest level in decades, closer to the current long-term target of 2%. The market expects the FED to cut interest rates by at least three times in 2024, with the first-rate cut occurring in June.
However, inflation may still increase as recent data showed that the path to this goal is still difficult. Accordingly, US officials are still hesitant about the decision to lower interest rates because the signals from the economy are unclear.
Meanwhile, former FED Chair Louis James Bullard has just warned that the FED needs to cut interest rates early and slowly. He said it would be awkward when the FED has an inflation rate of nearly 2%, but its policy rate is still 5.25-5.5%. According to him, the US February jobs report increased the possibility that the central bank will make its first interest rate cut.
He said an unemployment rate increase to 3.9% would be the highest in more than two years. The US employment report for February, released by the Department of Labor on March 8, showed that the economy added 275,000 new jobs in February. After adjustment, the three-month employment grew over an average of 264,000 new jobs. With current macroeconomic data, Bullard affirmed that all the current numbers were quite good, but he does not see anything about an unusually high risk of recession. Therefore, it is time for the FED to lower interest rates.
However, current FED officials are still hesitant about a specific decision to lower interest rates this year. At a testimony before the Senate Committee on Monetary Policy on March 7, FED Chairman Jerome Powell said that in the context of the US economy maintaining strong growth, the labour market is stable, and progress is being made. As part of its continued efforts to reduce inflation, the FED could begin cutting key lending rates this year if the economy continues to grow positively. The FED intended to reduce interest rates this year from 5.25-5.5%, but the agency has not yet determined when to make the decision.
Some FED officials still advised caution against the risk of the return of the “inflation ghost”. This could weaken all efforts to control US inflation in the past, and the inflation report in January 2024 is the “clearest warning”. FED Chair Jerome Powell, in a recent statement, also cautiously assessed that progress in curbing inflation is currently uncertain.
At present, the FED is still hesitant to reduce interest rates. However, analysts expected this interest rate policy would change in the coming months, along with positive signals from the inflation index and the US job market. According to a survey from CME, the market evaluated a 70% chance that the FED will begin reducing interest rates around mid-June.
Once the world's number one economy changes its policy towards reducing interest rates, this is not only good news for US businesses but also a positive signal for the global economy because it is an important milestone, showing that inflation has been pushed back and the global economy has the potential to enter a period of stable growth after COVID-19 pandemic.
