Fed Reserve chief Powell promises rate cut

The US Federal Reserve Chairman Jerome Powell spoke at last at Jackson Hole on Friday what everyone was waiting to hear. Powell said, “The time has come for policy to adjust. The direction of travel is clear, and the timing and place of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”

Despite the cautionary words, Powell’s are being interpreted to mean that the Fed’s battle against inflation is over, and he does not want to maintain the interest rates at 5.25 per cent to 5.50 per cent, which would impact hiring.

The Fed wants to support the labour market. The inflation rate fell to 2.5 per cent from a high of 7.1 per cent in the Covid aftermath. But it is still a bit above the Fed’s mandated 2 per cent inflation rate. Interestingly, the rate cut comes about a month before the presidential election. The rate cut would be announced at the Fed meeting of September 17-18, and the election is on November 5. Powell has been appointed Fed chairman by Donald Trump, former president and the Republican nominee for the White House. It is being said that after 1976, this is the closest that rates cuts would be announced before a presidential election.

The American economy will indeed breathe a sigh of relief because the high interest rates increased borrowing costs and it was affecting new ventures, and consequently hiring. So, will the announcement of rate cut in September help Trump’s chances of winning the election? In 1976, Jimmy Carter, the Democrat challenger, won the election.

There is also the fact that the unemployment rate now stands at 4.3 per cent, an increase from 3.4 per cent a month ago. Even as the interest rates rose in the last two years, unemployment rate during the same period fell from a Covid-high of 14.8 per cent in 2020 when 20 million people lost jobs.

The average unemployment rate has remained around 5.7 per cent since the 1940s. Some of the economic theorists raise the fundamental question whether the interest rate is connected to inflation rate in the first place. The debate continues but the Fed Reserve and other central bankers across the world use interest rate as a weapon to fight inflation. And they seem to succeed in some ways. But higher borrowing costs do affect economic growth, and there is always the apprehension that higher interest rates may even induce depression, and on a much less alarmist scale, recession in the economy.

American economy has other challenges than that of inflation and unemployment. The issue is that of American industries and businesses fleeing the country in search of cheap labour and tax incentives. The cost of labour is high in America compared to many of the developing countries. It is not surprising therefore that American industrialists and business folk should be seeking countries with a cheaper wage bill.

Also, compared to the tax rates in America, developing countries offer attractive rebates in their attempt to attract investment and establishment of foreign manufacturing in their own countries. Trump has been promising that he would bring manufacturing back to America and that he would impose higher tariffs on imports from countries like China. It is not certain that the strategy would work.

Kamala Harris, the Democrat presidential nominee, professes a better deal for the working class and the middle class in America, but she has not spelt out how she plans to achieve it. Powell’s announcement about the future rate cuts is a gleam of good news in what appears to be a bleak scenario for the American economy.