Fed signals potential rate cut in September

The U.S. Federal Reserve (Fed) has signaled that it may cut its benchmark interest rate next month, potentially ending the global high-interest-rate cycle that began in early 2022. If the Fed proceeds with this move at its September meeting, it would mark the first rate cut in over two and a half years. Other major economies, including Europe and China, have already started lowering rates or are preparing to do so. Given the ongoing challenges of sluggish domestic demand and a weakened property market, South Korea is also likely to follow the U.S. in reducing rates sooner rather than later.

The Federal Open Market Committee (FOMC) met on Wednesday and kept the benchmark interest rate steady at 5.25-5.50%. However, the Fed hinted at the possibility of a rate cut in September, contingent on stable inflation levels. "The broad sense of the committee is that the economy is moving closer to the point at which it would be appropriate to reduce our policy rate," Fed Chair Jerome Powell stated at a press conference following the meeting. “A rate cut could be on the table at the September meeting. I can imagine a scenario in which there would be everywhere from zero cuts to several cuts, depending on the way the economy evolves.” The New York Times interpreted Powell's remarks as implying that “the Fed allows for the possibility of as many as three rate cuts, in September, November, and December.”

On Wall Street, there is a near certainty that the Fed will cut rates in September. Analysts also see a 13.5% chance of a "big cut," where rates could be lowered by half a percentage point in one go. The Fed's readiness to begin cutting rates stems from its assessment that inflation has cooled and the labor market has softened. Personal Consumption Expenditures (PCE) growth, a key inflation measure for the Fed, stabilized at 2.5% year-over-year in June, down significantly from over 7.0% in 2022. Meanwhile, unemployment has risen to 4.1%, the highest level in nearly three years. These factors underscore the increasing need for rate cuts to stimulate economic growth.


Woo-Sun Lim imsun@donga.com