Occasionally I see a job and think, “I would NOT want that job”. Last week that was the U.S. Fed Chair held by Jerome Powell. The U.S. Federal Reserve Open Market Committee meets regularly to determine U.S. monetary policy and adjust the U.S. Federal Funds Rate. This is the commonly-quoted interest rate setting bank rates and indirectly affects global interest rates and currency values. The significance of this power cannot be understated.
In the post-COVID inflationary environment the U.S. fed raised rates from 0% in 2021 to the 5.25-5.50% range where it’s been the last 13 months. That move was done to slow the velocity of money, particularly the $6 trillion in “new” money created and added to the economy during COVID. On September 18th, the committee adjusted this rate down by 0.5% in a move designed to spur economic growth. Their cover for this move was a slowing rate of inflation. This risk of cutting rates is that it unleashes cash from bonds and other interest bearing accounts into equities, real estate, and commodities; all inflationary.
Rates are expected to be revised another 0.5% lower by yearend and further cut to 2.8% by the end of 2025. Other countries will be pressured to move rates lower in tandem, or see their currencies appreciate versus the dollar (stifling exports). Many have already matched cuts.
The razor’s edge for the U.S. Fed has three options. Cutting too aggressively will spur another wave of inflation. Cutting too slowly raises the threat of recession. And the third option “just right” may be the impossible dream. Stay tuned – these moves will determine global currency rates, global competitiveness, and economic growth or contraction in the U.S.
~Brett Stuart