Fed’s Rate Cut: With Future Uncertain, Vigilance Must Not Wane

Editorial

15:00 JST, November 9, 2024

With inflation in the United States showing signs of settling down, its monetary policy has taken another step toward easing. However, there is concern that the policies advocated by U.S. President-elect Donald Trump could reignite rising prices in the future.

Not only would that be a blow to the U.S. economy, it would also have a significant impact on the global economy, including Japan. Therefore, vigilance is needed.

The U.S. Federal Reserve Board has decided to lower its policy interest rate by 0.25 points to 4.50%-4.75% per year. It was the second consecutive policy meeting in which the interest rate was cut, as the monetary policy was previously eased in September.

The U.S. economy has been hit by historically high inflation due to such factors as supply constraints caused by the COVID-19 pandemic, and the impact of Russia’s aggression against Ukraine.

As the Fed rapidly started increasing the interest rate from spring 2022, the rate of increase in consumer prices fell to 2.4% in September this year.

At a press conference, Federal Reserve Board Chairman Jerome Powell said the interest rate was lowered because inflation had moved “much closer” to the Fed’s 2% goal. It appears that the Fed chairman is becoming more confident about being able to ease high prices while maintaining a strong economy.

The U.S. economy is showing remarkable strength. In the July-September quarter of 2024, real gross domestic product increased by an annualized rate of 2.8% from the previous quarter, marking quarterly growth for the 10th consecutive time. It is also likely to have a positive impact on the global economy.

A risk factor for the future is the possibility that Trump’s campaign pledges to impose high tariffs and to implement large-scale tax cut measures will cause prices to increase again.

“In the near term, the election will have no effects on our policy decisions,” Powell said. There is a high degree of uncertainty about how Trump will implement his policies after taking office in January next year. It is important to analyze the impact of this and respond flexibly.

There is also concern that the Fed’s independence will be threatened. This is because Trump continued to put pressure on the Fed to lower interest rates during his first term in office in order to stimulate the economy. A situation must be avoided in which hasty interest rate cuts lead to a renewed acceleration of inflation.

Powell has also said that he will not resign, even if Trump presses him to do so. His term as the Fed chairman runs until May 2026. Powell should carry out policy management with a firm stance.

Meanwhile, it is concerning for the Japanese economy that the yen weakened to nearly ¥155 to the dollar for a time due to such factors as speculation about the Trump administration’s economic policies.

The Bank of Japan has shown its intention to raise interest rates if economic and price conditions develop as forecast. The central bank should carefully monitor the U.S. economy and foreign exchange market to determine the timing of policy changes.

(From The Yomiuri Shimbun, Nov. 9, 2024)