Expert: inflation resurgence in US could constrain Fed’s ability to maintain rate cutting cycle

9/22/2024 4:49:35 AM

(MENAFN) An anticipated resurgence of inflation in the United States next year could significantly constrain the Federal Reserve's ability to maintain its current cycle of interest rate cuts, according to expert analysis. On Wednesday, the Fed made a notable decision to lower its interest rate by 50 basis points, bringing it to a range of 4.75 percent-5.0 percent. This aggressive move marked the first rate cut by the central bank in over four years, following the onset of the coronavirus pandemic. The last instance of a 50 basis point cut outside of emergency measures during the pandemic occurred during the global financial crisis in 2008.

Lauren Saidel-Baker, an economist at ITR Economics, emphasized that while a 50 basis point cut is uncommon, it is not without precedent in the Fed's history. She pointed out that with the debate over the extent of the rate cut now resolved, the focus must shift to the broader implications of this monetary easing cycle. Despite the initial cut, concerns about inflation—central to the Fed's dual mandate—are still very much relevant. Although disinflation trends are observed, interest rates remain historically elevated.

Saidel-Baker highlighted that the Fed’s preferred inflation gauge, the core personal consumption expenditures (PCE) price index, continues to exceed the central bank's target of 2 percent. In July, the core PCE price index showed an annual increase of 2.6 percent, consistent with June’s figures, while registering a monthly rise of 0.2 percent. Additionally, the overall PCE price index, which incorporates food and energy costs, also experienced an annual increase of 2.5 percent in July, matching the previous month's rate. This sustained inflation underscores the challenges the Fed faces as it navigates its monetary policy in the coming months.

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