The US Federal Reserve’s easing cycle will be “mild” by historical standards when it starts cutting rates at its policy meeting in September, ratings agency Fitch said in a note.
In its report on the global economic outlook for September, Fitch predicts a cut of 25 basis points each at the September and December central bank meetings, before cutting rates by 125 basis points in 2025 and 75 basis points in 2026.
This will result in a total of 250 basis points of cuts in 10 moves spread over 25 months, Fitch noted, adding that the average cut from peak rates to the bottom in previous Fed easing cycles, up to the mid-2050s, was 470 basis points amounted to. an average duration of 8 months.
“One reason we expect Fed easing to occur at a relatively leisurely pace is that there is still work to be done on inflation,” the report said.
This is because CPI inflation is still above the Fed’s 2% inflation target.
Fitch also pointed out that the recent decline in core inflation – which excludes food and energy prices – largely reflected the decline in car prices, which may not be permanent.
US inflation fell to the lowest level since February 2021 in August, according to a report from the US Department of Labor.
The consumer price index rose 2.5% year-over-year in August, which was lower than the 2.6% expected by the Dow Jones and reached the lowest rate of increase in 3½ years. On a monthly basis, inflation rose by 0.2% compared to July.
The core CPI, which excludes volatile food and energy prices, rose 0.3% this month, slightly higher than the 0.2% estimate. Twelve-month core inflation remained at 3.2%, in line with forecast.
Fitch also noted that “the inflation challenges the Fed has faced over the past three and a half years are also likely to lead to caution among FOMC members. It took much longer than expected to curb inflation and gaps in central banks’ understanding of inflation have emerged. what drives inflation.”
Dovish China, hawkish Japan
In Asia, Fitch expects interest rate cuts in China to continue. He points out that the People’s Bank of China’s rate cut in July took market participants by surprise. The PBOC Reduce the 1-year MLF rate from 2.5% to 2.3% in July.
“[Expected] Rate cuts by the Fed and the recent weakening of the US dollar have created room for the PBOC to cut rates further,” the report said, adding that deflationary pressures are taking hold in China.
Fitch pointed out that “producer prices, export prices and house prices are all falling and bond yields have fallen. Core CPI inflation has fallen to just 0.3% and we have lowered our CPI forecasts.”
It now expects China’s inflation rate to reach 0.5% in 2024, down from 0.8% in its June outlook report.
The rating agency expects another 10 basis points of cuts in China in 2024, and another 20 basis points of cuts in 2025.
On the other hand, Fitch noted that “The [Bank of Japan] goes against the global trend of policy easing and interest rate hikes, more aggressively than we expected in July. This reflects the growing belief that reflation is now firmly entrenched.”
With core inflation above the BOJ’s target for 23 months in a row and companies ready to make “sustained” and “significant” wage increases, Fitch said the situation was very different from the “lost decade” of the 1990s , when wages failed to grow amid persistent deflation. .
This plays into the BOJ’s goal of a “virtuous wage-price cycle” – increasing the BOJ’s confidence that it can continue to raise rates towards a neutral environment.
Fitch expects the BoJ 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% at the end of 2026, above consensus. A more aggressive BOJ could continue to charge global interest rates.” implications.”