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The U.S. central bank looks set to cut interest rates next week after inflation in the world’s largest economy fell to a three-and-a-half-year low.
Yesterday’s official data showed that consumer price inflation fell from 2.9% in July to 2.5% in August, beating expectations that it would reach 2.6%. It last fell in February 2021.
The US Federal Reserve now looks certain to cut rates on Wednesday, for the first time since 2020.
Keeping up: The Federal Reserve is preparing to follow other central banks with its first interest rate cut
The Bank of England’s next rate-setting meeting will take place a day after the Federal Reserve’s, although it is widely expected to opt for no change, having already announced a cut last month. And the European Central Bank looks set to cut rates for a second time this year when policymakers meet today.
The three central banks are trying to ease the pain caused by high borrowing costs, which have risen as part of the fight against rising inflation. In the United States, inflation peaked at 9.1% two years ago.
The Federal Reserve is now interested in trying to ensure a “soft landing” – that is, that inflation can be controlled without causing an economic recession.
Expectations for a rate cut intensified last month when Federal Reserve Chairman Jerome Powell said that “the time has come to tighten monetary policy.” But signs of a weakening labor market have alarmed some on Wall Street, who fear the Fed is acting too late and may have to implement a large rate cut of half a percentage point.
However, experts said yesterday’s inflation figures would make the Fed more cautious. This was because the monthly underlying measure of core inflation – which excludes food and energy – was 0.3%, compared with 0.2% in July.
The Dow Jones Industrial Average in New York initially traded lower following the figures.
“This is not the report the market wanted to see,” Seema Shah, chief global strategist at Principal Asset Management, said yesterday.
Isaac Stell of investment platform Wealth Club said: ‘While US core inflation was a bit too warm over the summer, broader inflation continues to trend lower, slowing enough for the Fed to start cutting interest rates.
‘The big debate now is whether to opt for a rate cut of 0.25% or 0.50%.
‘We suspect the Fed will be careful not to release the brakes too quickly and risk inflation accelerating again.’
Inflation has become a key battleground in the US presidential election campaign.
In a debate this week, Donald Trump attacked his opponent Kamala Harris over the inflation crisis that began a few months after she took office as President Joe Biden’s vice president.
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