US Inflation is Falling – Will The FED Cut Interest Rates Soon?

Aug 16, 2024

The US Inflation Rate Dropping - Will Interest Rates Follow?

The US interest rates have been flying high since March 2022, with the last incremental taking place in July 2023. However, we might be on the brink of the first time after 30 months.

The spiking inflation rates in the United States seem to have calmed down, raising the speculations for a FED rate cut. However, this anticipation has been building up for a couple of months. Will it finally happen? Let’s analyse what happened and what the predictions are.

July Inflation Rates in The US

The month-to-month inflation reports showed a slight improvement in the July figure as the price inflation dropped to 2.9%, which is only a 0.1% decrease from the previous month.

However, the economy recorded the first drop under the 3% mark for the first time since March 2021, suggesting a noticeable economic progress.

It is hard to point out the factors contributing to this decline due to the complexity of the US economy and internal political and social state. However, the state suggested that slowing housing and rental costs and slower grocery price growth are distinct reasons behind the July inflation rate.

How are Inflation and Interest Rates Correlated?

This slight improvement in inflation figures suggests a potential lending rate cut. Why is that?

Interest and Inflation rates have always been connected. Central banks impose higher interest rates when inflation increases to deter excessive spending and slow economic growth. Conversely, when inflation rates drop, a lower interest rate will encourage spending and stimulate economic growth, although proportionally.

Are FED Interest Rate Cuts Coming Soon?

The interest rate cuts in the US are overdue, and investors have been waiting for this news since March 2024, when the CPI dropped under the 3.5% mark. However, the Federal Reserve has been cautious about this move in anticipation of better inflation numbers.

The US central bank imposes a high 5.5% interest rate, which helped slash the inflation rate from 6.4% to 3.4% in 2023. However, the recently reported drop is expected to result in an interest rate cut in September.

Despite being based on speculations, economic specialists and insiders are highly optimistic about the upcoming lending rate drops, raising the possibility of this decision to 60-80%. However, the discussion now revolves around the nature of this drop, whether by 0.25% or 0.50%.

Impact on EU and UK Banks

The US bank policies affect global economies, especially in Europe and the UK, as these regulators try to align their financial policies with the US to avoid market manipulation and changing currency strength.

The Bank of England imposes a similarly high interest rate at 5%. However, the UK regulators are reportedly waiting for the inflation rate to reach a target figure of 2% before introducing a new rate reduction.

However, the ECB introduced rate cuts in June 2024, driving the base refinancing rate from 4.50% to 4.25% and the marginal lending rate from 4.75% to 4.50%.

Conclusion

US investors and institutions await a possible interest rate cut to come in September after 2.5 years. This anticipation comes after the US inflation rate decreased to 2.9% in July reports. However, the US regulator is cautious about this step, raising the speculations and potential outcomes after the decision.

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