Fed to ease slowly as more ‘work’ to be done on inflation: Fitch

The US Federal Reserve’s easing cycle will be “light” by historical standards when it starts cutting interest rates at its September policy meeting, ratings agency Fitch said in a note.

In its September global economic outlook report, Fitch forecast a cut of 25 basis points each at the central bank’s meeting in September and December, before cutting rates by 125 basis points in 2025 and 75 basis points basis in 2026.

That will mean a total of 250 basis points of cuts in 10 moves over 25 months, Fitch noted, adding that the median cut from peak to trough in previous Fed easing cycles to mid 1950s was 470 basis points with an average duration of 8 months.

“One of the reasons we expect Fed easing to continue at a relatively mild pace is that there is still work to be done on inflation,” the report said.

This is because CPI inflation is still above the Fed’s stated inflation target of 2%.

Fitch also pointed out that the recent drop in the core inflation rate – which excludes food and energy prices – mostly reflected the drop in car prices, which may not last.

US inflation fell in August to the lowest level since February 2021, according to a Labor Department report on Wednesday.

The consumer price index rose 2.5 percent year-on-year in August, falling short of the 2.6 percent expected by the Dow Jones and hitting its slowest growth rate in 3 1/2 years. On a month-on-month basis, inflation rose 0.2% from July.

The core CPI, which excludes volatile food and energy prices, rose 0.3% on the month, slightly higher than the estimate of 0.2%. The 12-month core inflation rate remained at 3.2%, in line with the forecast.

Fitch also noted that “Inflation challenges facing the Fed over the past three and a half years are also likely to generate caution among FOMC members. which causes inflation”.

In Asia, Fitch expects interest rate cuts to continue in China, noting that the People’s Bank of China’s rate cut in July took market participants by surprise. The PBOC cut the 1-year MLF rate to 2.3% from 2.5% in July.

“The (expected) Fed interest rate cuts and the recent weakening of the US dollar allowed the PBOC to cut rates further,” the report said, adding that deflationary pressures are becoming entrenched in China.

Fitch pointed out that “Producer prices, export prices and house prices are all down and bond yields have fallen. Core CPI inflation fell to just 0.3% and we have cut our CPI forecasts”.

It now expects China’s inflation rate to hit 0.5 percent in 2024, down from 0.8 percent in its June outlook report.

The rating agency forecast another 10 basis points of cuts in 2024 and another 20 basis points of cuts in 2025 for China.

On the other hand, Fitch noted that “(the Bank of Japan) bucked the global trend of policy easing and raised interest rates more aggressively than we anticipated in July. This reflects the growing belief that reflation is now firmly entrenched.”

With core inflation above the BOJ’s target for 23 consecutive months and companies set to pay “ongoing” and “substantial” wages, Fitch said the situation was quite different from the “lost decade” of the 1990s, when wages did not rise amid persistent deflation. .

This plays into the BOJ’s objective of a “virtuous wage-price cycle” – which boosts the BOJ’s confidence that it can continue to raise rates towards neutral settings.

Fitch expects the BOJ benchmark rate to reach 0.5% by the end of 2024 and 0.75% in 2025, adding that “we expect the policy rate to reach 1% by the end of 2026, above consensus . ramifications”.