Announcement from the Fed

Fall in interest rates

On Wednesday 18 September at 8 pm, the Fed made its long-awaited announcement regarding the country’s interest rates.

Forecasts had predicted a rate cut of 0.25 percentage points, which was largely confirmed until early September, before the release of the non-farm payrolls (NFP on 6 September) and inflation (CPI on 11 September) figures, both of which were weaker than expected.

Following these announcements, investor sentiment shifted slightly and the forecast for a 0.25 bps cut doubled.

Looking at the EUR/USD chart, we can see that following these two announcements, the market began to rise, allowing it to recover and thus absorb these rather poor figures.

With these figures accepted by investors and the market, market sentiment then shifted, leading us to favour a cut of 0.5 basis points.
Official forecasts were still predicting a 0.25 bps cut.
On Wednesday 18 September, Mr Powell finally delivered his verdict, and a cut of 0.5 bps was announced, rather than the expected 0.25 bps.

There was also a slight impact on the EUR/CHF pair, with the euro rising slightly against the Swiss franc by around 70 pips, trading at 0.9470 on Friday 20 September.

Mr Powell’s speech: Key takeaways

Jerome Powell’s speech on 18 September 2024 marked a significant turning point in the Federal Reserve’s monetary policy. Here are the key points:

• Interest rate cut: The Fed has cut its key interest rate by 0.50 percentage points, bringing it down to around 4.8%. This is the first cut in over four years.
• Inflation under control: Powell stated that inflation was under control, with a significant decline from 9.1% in 2022 to 2.5% in August 2024, close to the 2% target.
• Support for the economy: The Fed’s decision is aimed at supporting the labour market, which is showing signs of slowing down.
• Outlook: Powell has suggested that further rate cuts are likely before the end of the year. The aim is to stimulate growth whilst maintaining financial stability.
• Labour market: Although inflation is a priority, Powell noted that unemployment could rise slightly in the coming months, but the Fed does not foresee an immediate recession.
• Economic slowdown: The US economy is showing signs of slowing down, but Powell has expressed optimism about the Fed’s ability to adjust its policies as needed.
• Action plan: The Fed Chair also emphasised that further rate cuts are expected in 2025 and 2026, depending on how economic conditions develop.

Impact on US households

Furthermore, it is important to note that US household credit card debt has reached a record high of $1 trillion. This represents a significant increase, driven by inflation and high interest rates. Consumers are turning to credit cards to offset rising costs, particularly for essential purchases such as food, healthcare and bills. Credit card interest rates have also reached historically high levels, often exceeding 20%, which is putting further financial pressure on households.

The groups most affected by credit card debt in the United States are primarily low-income households and young adults. These groups feel the effects of inflation more acutely, as they have to rely on credit to cover basic expenses such as food, housing and healthcare. High credit card interest rates make repayment difficult, often trapping these groups in a cycle of debt. Economic insecurity and low savings further exacerbate their vulnerability.

Many investors are wondering why the Fed cut rates by 0.5% when its statement is fairly encouraging regarding the US economy. If that were the case, the Fed would have cut rates by just 0.25 percentage points. Was the Fed simply being cautious in the face of a potential cyclical slowdown? Did it anticipate its decision on 9 November, which could be affected by a turbulent presidential election?

Source (graph): https://www.tradingview.com/x/eeiIA7vF/

Photo credit: Kevin Mohatt