Markets and analysts are expecting the US Federal Reserve (Fed) to start lowering interest rates in September, helping to create more momentum for the economy not only in the US but also globally.

Fed likely to start lowering interest rates from September

In the post-COVID-19 reopening period, the return of inflation has become the number one threat to the US economy. Inflation exceeded the acceptable level of 2% for the first time in March 2021 and peaked in June 2022 at 9.1%, the highest level in 40 years in the US.

This forced the Fed to intervene to restrain by continuously raising interest rates from March 2022. From July 2023 to now, interest rates have been kept at 5.25% – 5.5%, the highest level since the second quarter of 2001.

By July, the US inflation index was controlled down to 2.9%, the lowest level since March 2021 and lower than the previous forecast of 3%.

There had been speculation that the Fed would begin cutting rates as soon as the Federal Open Market Committee (FOMC) met on July 31. However, at that time the Fed assessed that “ the economic outlook is highly uncertain,” so it kept rates unchanged. Fed Chairman Jerome Powell noted that if inflation declines quickly or in line with expectations, “a rate cut could be considered at the September meeting.”

Economic reports released in early August are allowing investors and experts to expect the Fed to soon announce a rate cut.

The US economy grew 5.2% in the second quarter from a year earlier. Adjusted for inflation, the second quarter’s economic growth rate was 2.8%, double the first quarter’s 1.4%, a higher-than-expected increase.

The unemployment rate rose for a fourth straight month in July, to 4.3%, but remains relatively low. The good news is that the rise in unemployment was not accompanied by other recession indicators such as changes in bond yields.

Analysts believe the Fed will announce a rate cut at the FOMC meeting on September 17 and 18. The remaining questions are how much the cut will be and what the roadmap will be.

Bank of America, Goldman Sachs, Morgan Stanley, as well as the FedWatch tool of the CME Group (USA), predict that the Fed will cut interest rates by 0.25% in September.

Most experts surveyed by Reuters believe the Fed will gradually lower interest rates, starting in September. Most predict a steady 0.25% cut after each FOMC meeting, to a range of 4.5% to 5.5%.4.75% by the end of this year. Some experts predict that interest rates could fall more than 1% as early as 2024.

The US economy is heading towards a “soft landing”

Assessing the US economic outlook, Mr. Raphael Bostic – President of the Federal Reserve Bank of Atlanta (Georgia, USA) commented that the US job market and economy seem quite healthy. Mr. Bostic expects a “soft landing”, when inflation falls to the 2% target without a recession.

Former President of the Federal Reserve Bank of St. Louis, Missouri, James Bullard, also shares this view. According to Bullard, the US economy is currently witnessing all the signs of a “soft landing”: economic growth is at potential levels, the job market is quite balanced and inflation is not too far from the target.

The Fed forecasts the US economy will grow 1.8% in 2024. However, according to the opinion of more than 100 experts surveyed by Reuters , the average growth rate is up to 2.5%. Growth momentum around this level is expected to be maintained until 2027.

JP Morgan predicts that core inflation in the US will continue to decline slightly for the rest of 2024 while the economy continues to grow albeit more slowly and the job market becomes more balanced.

Jonathan Millar, senior economist at Barclays, a financial services company, said the US job market is in a stable phase, although the unemployment rate could increase by about 1/10 compared to the current level, it will not cause major problems.

Goldman Sachs bank assessed the risk of a recession in the US economy at 20%, down from the 25% forecast announced half a month ago and could fall even further, according to CNBC .

With these positive indicators and optimistic forecasts, if the Fed lowers interest rates from September, the US economy will be given more momentum.

Lower interest rates stimulate consumer spending . Lower interest rates can help companies borrow more, reducing the cost of debt, which increases their ability to invest in production, new projects, and research and development. However, it usually takes at least a year for a change in interest rates to have an impact on the overall economy.

However, the stock market usually reacts much faster. Right from the moment the Fed released the minutes of the July FOMC meeting with information about the possibility of lowering interest rates, a series of indices such as the Dow Jones, Nasdaq, S&P 500 (US), FTSE 100 (UK), DAX 30 (Germany) and CAC 40 (France) all increased points.