The endless day of the Fed rate drops

“I was ready to wait for an additional cycle, but I cannot wait indefinitely.” These words are those of Mary Daly, president of the Fed of San Francisco. Meanwhile, They illustrate one thing: the consensus within the Fed has switched to a drop of 25 base points in September.

Less than a week ago. Furthermore, just after the Fed meeting and a status quo rather hawkishthe probabilities of rate drops in September increased below 50%. Therefore, From now on, the prognosis has risen 92%. Therefore, The whole thing, following a lower employment report than waiting on Friday. Consequently, A situation reminiscent of endless day fed rate drops what we had experienced last year.

New year, same story ?

If we replace itself last July, the Fed has maintained its key rates for a year between 5.25 and 5.5%. Similarly, And as inflation slows down. the market is watching only one thing, the start of the rate of drop in rates. But the Fed is prudent. Inflation slows down, of course, but remains high (2.7% for the core PCE last summer). And the American economy is still full of employment, so there is no reason to rush. Thus, the Fed decided on July 31 to leave its rates unchanged.

But two days later, a report on employment comes out very below expectations. The market narrative changes completely: the Fed is late and it is necessary to lower the rates. In the following weeks. the question is then whether the Fed must start its rate of lower rates endless day fed rate drops by a movement of 25 or 50 base points. It was ultimately the “50 camp” that won. The Fed will then make two other decreases of 25 base points. in November and December, before a break from the return of Donald Trump and the threat of the threat of tariffs.

The continuation has shown that the American economy was still solid. that the employment data in summer 2024 was more a statistical anomaly than the start of a reversal.

In the end, inflation began to bounce back … when the Fed began its lower rate cycle.

Sources : Bureau of Economic Analysis, Federal Reserve, Bloomberg

A delicate position

The parallel with the current situation is that the last employment report is probably not so worrying. Indeed, even if the job creations are low in absolute terms, the unemployment rate remains stable endless day fed rate drops (between 4 and 4.2% over the last 12 months) and coherent with a level of full employment.

We are undoubtedly simply in a new balance: companies hire more caution, which makes the demand for work lower. In parallel, immigration falls sharply, which reduces the labor supply. Result: it only takes few job creations to maintain the unemployment rate.

It should therefore not be concluded too quickly that the labor market is deteriorating and rushing to lower rates. Especially since the first effects of customs duties are beginning to be felt on inflation. But it will take several months before their complete impact appeared. in particular due to the stocks made at the start of the year, before the entry into force of these measures.

If the Fed drops its rates in September by invoking the risks on employment. it could then be found in a fairly uncomfortable situation, namely an endless day fed rate drops economic activity which remains solid and an inflation which goes up.

The Fed will therefore have to be cautious and not to rush. The whole thing, with immense pressure from Donald Trump, who has been calling for months for months.

Following the resignation of Adriana Kugler on Friday. the American president is expected to announce this week the appointment of a new governor. A personality which, a priori, will be favorable to rate reductions.