International ratings agency Fitch said in a report that by historical standards, when the Federal Reserve begins cutting interest rates at its September policy meeting, its easing cycle will be "mild."
In its September Global Economic Outlook report, Fitch predicted that the Federal Reserve would cut interest rates by 25 basis points at its September and December meetings, and then cut rates by 125 basis points and 75 basis points in 2025 and 2026, respectively.
This would imply 10 rate cuts totaling 250 basis points over 25 months, Fitch noted, adding that in previous Fed easing cycles since the mid-1950s, the median cumulative rate cut from peak to bottom was 470 basis points, with a median duration of eight months.
"We expect the Fed to move forward with policy easing at a relatively modest pace, in part because there is still work to do on inflation," the report said. That's because CPI inflation remains above the Fed's 2% target.
Fitch also noted that the recent decline in core inflation, which excludes food and energy prices, mainly reflects a decline in motor vehicle prices, which may not be sustained.
According to a report from the U.S. Department of Labor on Wednesday, the U.S. CPI rose 2.5% year-on-year in August, lower than the expected 2.6%, the lowest increase in three and a half years; it rose 0.2% month-on-month. Excluding the more volatile food and energy prices, the core CPI rose 0.3% that month, slightly higher than the expected 0.2%; the year-on-year growth rate remained at 3.2%, in line with forecasts.
Fitch also noted that "the inflation challenges the Fed has faced over the past three and a half years are also likely to make FOMC members cautious. It has taken much longer than expected to curb inflation, and gaps have emerged in central banks' understanding of the drivers of inflation."
In Asia, Fitch said, "The Bank of Japan is bucking the global trend towards policy easing by raising rates more than we expected in July. This reflects its growing conviction that reflation is now entrenched."
With core inflation running above the BOJ’s target for 23 straight months and companies poised to pay “sustained” and “substantial” wages, the situation is a stark departure from the “lost decade” of the 1990s when wages failed to grow amid persistent deflation, Fitch said.
This is consistent with the Bank of Japan's goal of a "virtuous wage-price cycle", which strengthens the Bank of Japan's confidence in continuing to raise interest rates to a neutral level.
Fitch expects the Bank of Japan's benchmark policy rate to reach 0.5% by the end of 2024 and 0.75% in 2025, adding: "We expect the policy rate to reach 1% by the end of 2026, higher than market expectations. The Bank of Japan's more hawkish stance is likely to continue to have global repercussions."
Article forwarded from: Jinshi Data
