US Federal Reserve cuts interest rates for first time in two and a half years | Economy

The Federal Reserve cut interest rates by 50 basis points to between 4.75% and 5%, ending a monetary tightening cycle that began in March 2022, and the central bank expects another 50 basis point cut this year.

Inflation

Inflation rates fell in August to 2.5% on an annual basis from 2.9% recorded in July, but the consumer price index remains above the Federal Reserve’s long-term target of 2%.

Core inflation, which excludes more volatile sub-indexes such as food and energy, was 3.2%, in line with expectations and the rate recorded in July.

The Consumer Price Index, the most common measure of inflation, tracks price changes within a specified basket of goods and services that the average American consumer might purchase during a given period.

Inflation rates began to decline after the Federal Reserve raised interest rates from the near-zero levels that prevailed from March 2020 until March 2022, to a range between 5.25% and 5.5%, where it has been stable since last July.

Retail sales rose 2.1% year-on-year in August, and online store sales rebounded 1.4% last month after falling 0.4% in July.

U.S. GDP grew 3% in the second quarter on an annualized basis, up from the 2.8% initially reported last month, and the economy grew 1.4% in the first quarter.

Pressure

Calls for a rate cut have increased following pressure from markets after labor market data released last month led to expectations of an economic recession, causing a global wave of declines in stock markets led by Wall Street.

The Labor Department said early last month that nonfarm payrolls increased by 114,000 jobs in July, well below the median forecast of 175,000 in a Reuters poll of economists and well below the 200,000 jobs economists had thought were needed to keep up with population growth.

The unemployment rate jumped to 4.3% in July, nearly the highest level in three years.

In August, U.S. employers added 142,000 non-farm jobs.

However, the increase was less than economists had expected, who had expected nonfarm payrolls to reach 160,000 jobs in August, according to FactSet data.

The US government revealed last month that previous reports had significantly overstated the recent recovery in the labour market, which could be a worrying development given that slowing job growth is already undermining confidence in the economy.

Personal spending

The Commerce Department said late last month that consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.5 percent in July after rising 0.3 percent in June.

That means consumer spending maintained most of the momentum from the second quarter, when it helped boost GDP growth to a 3% annual rate.

The personal consumption expenditures price index rose 0.2% in July after rising an unrevised 0.1% in June.

The personal consumption expenditures price index also rose 2.5% in the 12 months to July, after rising at the same rate in June.

ready

Federal Reserve Chairman Jerome Powell last month made a vocal supporter of monetary easing, saying he did not want the labor market to remain tight and expressing confidence that inflation was close to the central bank’s 2% target.

“Upside risks to inflation have diminished. Downside risks to employment have increased,” Powell told the Fed’s annual economic conference in Jackson Hole, Wyoming.

He continued: “It is time to adjust the policy. We do not want further scarcity in the labor market conditions, nor do we welcome it.”