Annual inflation fell to 2.5% in August, according to figures released by the Labor Department on Wednesday, September 11. This is its lowest level since February 2021. "Today's report shows that we are turning the page on inflation," said Lael Brainard, economic advisor to President Joe Biden. Price rises peaked at 9.1% in June 2022. Excluding energy and food, the rise remains at 3.2%, a slightly worse figure than expected. This is due to housing prices – both rental and purchase – which are still high following the post-Covid-19 boom in prices and mortgages.
Month-on-month, the trend is similar, with an overall price increase of 0.2 points. This very respectable figure must be set against employment figures, as the Fed's mission is twofold: to ensure price stability and to promote full employment. The job market, however, is rapidly cooling down. In August, for example, the country created just 142,000 new jobs, after a poor 89,000 in July. The conclusion is that it is time to loosen the grip on the national economy.
Markets are debating whether the Fed will cut rates, currently set above 5.25% – a record since 2006 – by a quarter or half a point following its Monetary Policy Committee meeting on Wednesday, September 18. There are many arguments in favor of a measured quarter-point cut: firstly, the decline in inflation remains fragile; and then, a half-point cut could panic the markets – proving that recession is looming and that the Fed is one battle behind – but also accentuate the economic gloom, whereas the Federal Reserve has for years endeavored to be predictable.
This is also the institution's last meeting before the November presidential election, and its chairman, Jerome Powell, must not be suspected of pursuing partisan politics. Donald Trump has accused him in recent months of wanting to lower rates in order to help the Democrats and has explained that he wants to have a say in setting monetary policy if he returns to the White House. Slow and steady, that's the price of independence that should lead the Fed to favor a cautious move. "A fifty-basis-point cut is probably no longer on the agenda," wrote Christophe Boucher, Chief Investment Officer at ABN Amro.
Questions are being raised about a US economy that is difficult to decipher. Markets stalled in early August and early September but then recovered. Artificial intelligence (AI) technology stocks were clearly overvalued despite the fact that the direct impact of this technological revolution will be long-lasting. The correction is underway, as microprocessor giant Nvidia, a symbol of AI, has fallen by around 20% since its peak.
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