8/9/2024–|Last update: 8/9/202412:17 AM (Makkah Time)
Global markets are looking to the Federal Reserve (the US central bank) amid speculation about the size of the next interest rate cut. In recent years, the Fed has focused its efforts on controlling rising inflation, but recent developments suggest that it is approaching a major interest rate cut as signs of a slowdown in the US labor market emerge.
The question now is no longer whether there will be a reduction, but how much.
According to a recent report by the Wall Street Journal, the August jobs report showed a continued loss of momentum in the labor market, reinforcing expectations that the Fed could cut interest rates by more than 50 basis points, something that was considered far-fetched just a month ago, compared to the usual 25 basis point cut.
According to the newspaper, the statement of Federal Reserve Board member Christopher Waller supported these expectations when he indicated that “the risks are now tilted towards the employment side,” within the framework of the Federal Reserve’s dual mandate.
Crossroads
Despite the relative stability in the labor market, where sectors were not affected across the board, sectors such as technology and finance witnessed large layoffs, which increased pressure on the Federal Reserve to act.
Many companies, especially with high borrowing costs, are postponing their expansion or investment plans, which is causing concern among investors. Added to this is the political uncertainty related to the upcoming presidential elections in November 2024.
The Fed faces a challenge, according to the Wall Street Journal, in achieving a soft landing for the economy without sacrificing the labor market or investment. But concerns are that cutting interest rates too quickly could backfire if it is done without careful consideration of economic and political details.
Differences between Trump and Harris
The 2024 presidential race is further complicating the situation, the newspaper says. According to Goldman Sachs’ forecasts, former President Donald Trump’s economic policies, which include new tariffs, could weaken US growth, despite his pledges to cut corporate taxes.
Trump is proposing to cut taxes on companies that make their products in the United States from 21% to 15%, which could have a big impact on the economy, but depends heavily on Congressional approval.
In contrast, Kamala Harris, the current vice president, has pledged to increase the capital gains tax to 28% for Americans earning more than $1 million, a proposal aimed at balancing the economy by focusing on large corporations.
Fed decision and the market
As inflation continues to decline, reports indicate that many companies are still feeling the pain of higher borrowing costs, which is affecting their future decisions.
The Fed’s decision on the size of the expected interest rate cut will be a turning point in determining the market’s direction, especially with the approach of the presidential elections, which will greatly affect the country’s economic path.
Meanwhile, the newspaper says that Federal Reserve Chairman Jerome Powell will face pressure to make a decisive decision that balances between cutting interest rates to support employment and maintaining economic stability.
If the cut is larger than expected, it could have a positive impact on companies suffering from high borrowing costs, but at the same time it could raise concerns about long-term price stability.
Investors and business owners are awaiting the results of the Federal Reserve’s meeting later this month, when the council will have to determine the optimal size of interest rate cuts to achieve a balance between controlling inflation and supporting the labor market.
With the presidential election still in doubt, the question remains: Will a rate cut be enough to propel the economy toward growth, or will political and economic interventions continue to confuse markets?
