US inflation rose by 2.9% in August, as the effects of the tariffs begin to creep in. With a weakening labour market and falling US confidence, what direction the Federal Reserve choose is the big question.
A rate cut is expected later next week, with a 0.25 point most likely despite Republicans pressure for something bigger. But is a cut really the right medicine now?
Why a Rate Cut is a Bad Idea
Many businesses and households are always in favour of a rate cut because it will unlock more spending power. They will spend less interest on loans and will be better off due to higher income/revenue. However, with persistent inflation lying around in the background, will a rate cut have any benefit?
A rate cut will only be beneficial if the underlying wage rises above inflation in which it hasn’t done for a while. Therefore, a rate cut may accelerate the speed of inflation and lift inflation outside the 2 – 3% range, a target range the central bank tends to work towards.
Last week’s news of just 22,000 jobs being added in August has forced the Federal Reserve into a tricky position, and Powell may be the last sane person to see this. With a change in power in the talks, it is important for both parties, households and businesses to evaluate the character of the new Federal chair.
Maybe if Trump hadn’t imposed tariffs, things could have been a lot better today, but this is the true beauty of economics. Everyone has their own way and world, and the challenges lie in how to navigate yourself around it.
For households, a rate cut is a sign of relief for those who are on variable rates, and businesses may have a slight relief from higher interest rates. But don’t let this rate cut lose your focus on the overall picture; inflation is still a threat to the global economy.
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