Significant Interest Rate Cut in U.S.: Turning Point Reached in Fight against High Prices

Editorial

16:08 JST, September 20, 2024

The U.S. Federal Reserve Board has cut its interest rates for the first time in 4½ years, marking a turning point in the fight against inflation. It is hoped that the Fed will continue to carefully steer monetary policy to achieve stable growth.

The Fed has decided to cut its policy interest rates by 0.5 percentage points — double the typical 0.25 percentage point adjustment — to the 4.75%-5% per year range. It is the central bank’s first interest rate cut since March 2020, when the COVID-19 pandemic was taking off.

The Fed has also indicated the prospect of an additional 0.5 percentage point rate cut within the year.

At a press conference, Fed Chair Jerome Powell, speaking about the reasons why the Fed decided on the hefty interest rate cut, said it was a “sign of our commitment not to get behind,” taking into account a slowdown in employment growth and other factors.

Powell was likely wary of the risk that being too cautious in cutting interest rates could cause the economy to stall and the employment situation to deteriorate.

The U.S. economy experienced historic price increases in June 2022, when the consumer price index rose above 9% triggered by such factors as supply constraints during the pandemic.

As a result of raising policy interest rates to high levels to curb inflation, the CPI fell to 2.5% in August from a year earlier.

It is a positive factor that an exit toward the 2% target is in sight while the economy continues to show outstanding strength.

However, it is difficult to ascertain the trend for inflation that is triggered not by an overheated economy but by pandemic-induced supply constraints. There are concerns that a hasty rate cut could lead to a resurgence of high prices.

To bring the economy to a “soft landing,” it is essential to carefully examine price and other economic trends and to be flexible in determining the pace of interest rate cuts.

The latest Fed meeting was the last before the U.S. presidential election in November. It is thought that support for the economy through a large rate cut will work favorably for the economic policy of Vice President Kamala Harris’ camp, while former President Donald Trump might intensify his criticism of the Fed.

However, the Fed should make policy decisions based on economic and price conditions without being constrained by the election campaigns.

U.S. monetary policy also has a significant impact on the exchange market.

The excessive depreciation of the yen against the dollar has pushed up import prices and contributed to high consumer prices, straining household budgets. The Fed’s decision to shift to cutting interest rates can be expected to ease the pressure caused by the yen’s depreciation against the dollar.

Meanwhile, the Bank of Japan was to decide on its provisional monetary policy on Sept. 20. Contrary to the Fed, the BOJ intends to consider the timing of additional interest rate increases. During periods of policy transition, it is easy for financial markets to become highly volatile.

It is hoped that BOJ Gov. Kazuo Ueda will be more careful in how he disseminates information so as not to cause turmoil in exchange and stock markets.

(From The Yomiuri Shimbun, Sept. 20, 2024)