On September 18, the US central bank lowered interest rates for the first time in four years, reducing the key lending rate by half a percentage point to a range of 4.75% to 5%.
There are no definitive signs indicating a major recession in the US for 2024. Although growth has decelerated, many analysts contend that the apprehensions surrounding an imminent recession may be overstated. The US labor market, despite showing some signs of weakening, remains relatively robust, and consumer spending continues to bolster the economy. However, the persistent high levels of household, business, and government debt present ongoing threats to economic and financial stability.
The Federal Reserve's decision on September 18 was its first interest rate cut in four years, bringing the target range for the federal funds rate down by 50 basis points to 4.75% to 5%.
Data released by the US Department of Labor on September 11 indicated that the Consumer Price Index (CPI) rose by 2.5% year-on-year in August, which is 0.4 percentage points lower than in July. This marks the smallest increase since February 2021, suggesting a continued slowdown in inflation.
Qanit Khalilullah, Director of a corporate and management consulting firm and an expert in economic and public policy, stated, I do not endorse the use of monetary policy to adjust interest rates. Instead, I support regulating the money supply through a full-reserve banking system, where money growth is synchronized with the GDP growth of real goods and services. This method helps avert inflation and deflation, thus sidestepping boom-and-bust cycles.
Increasing interest rates typically enhance the value of the dollar by drawing foreign investors looking for higher returns, while making assets like gold and stocks less appealing due to rising borrowing costs. Conversely, when interest rates decrease, the dollar's value diminishes, making investments in gold, stocks, and oil more attractive.
At the same time, the US labor market continues to exhibit signs of pressure. Data from the Labor Department reveals that job cuts reached 1.76 million in July, the highest since March 2023. From March 2022 to July 2023, the Federal Reserve raised interest rates 11 times, totaling a cumulative increase of 525 basis points. The Fed has kept the federal funds rate target range at 5.25% to 5.5%, the highest level in 23 years.
Nobel laureate and economist Joseph Stiglitz highlighted the limitations of relying on monetary policy to manage inflation. He criticized central banks for their confidence in raising rates, comparing it to a dog believing its barking scared off airplanes. Stiglitz emphasized that inflation is primarily driven by supply-side disruptions and changes in demand patterns, and as these issues are addressed, inflation is expected to continue to decline.
According to the Financial Times, the recent rate cut signifies a pivotal moment for the Federal Reserve following more than two years of fighting inflation. This decision also plays a crucial role in this year's presidential election, favoring Democratic candidate Kamala Harris. Decreasing borrowing costs may alleviate voter concerns regarding high living expenses, even as the economy continues to perform robustly. However, job growth has slowed, and other demand indicators, such as job vacancies, have weakened, despite historically low unemployment claims.
The US Bureau of Labor Statistics' Current Employment Statistics (CES) program provides comprehensive industry estimates of nonfarm employment, hours worked, and earnings for workers nationwide, encompassing data from all 50 states and over 450 metropolitan areas.
Each month, CES surveys roughly 119,000 businesses and government agencies, representing about 629,000 individual worksites.
THE AUTHOR IS A STAFF CORRESPONDENT.
