The Federal Reserve’s upcoming easing cycle is expected to be relatively mild compared to historical standards, according to a recent report by Fitch, a leading ratings agency. The report forecasts that the Fed will implement a 25-basis-point rate cut at both its September and December meetings, followed by additional cuts of 125 basis points in 2025 and 75 basis points in 2026. This gradual approach will result in a total of 250 basis points of cuts over 10 moves spanning 25 months.
Fitch notes that previous Fed easing cycles have typically involved larger cuts, with a median reduction of 470 basis points over a duration of 8 months. The agency attributes the gentle pace of the upcoming easing cycle to the need to address inflation concerns, as the Consumer Price Index (CPI) remains above the Fed’s target of 2%. Despite a recent decline in core inflation, driven primarily by a drop in automobile prices, Fitch believes that this trend may not be sustainable.
In August, U.S. inflation reached its lowest level since February 2021, with the consumer price index rising by 2.5% year-on-year. Core CPI, excluding food and energy prices, increased by 0.3% for the month, slightly higher than expected. Fitch emphasizes that the Fed’s challenges in managing inflation over the past few years have heightened caution among policymakers, highlighting gaps in understanding the factors influencing inflation dynamics.
Turning to Asia, Fitch anticipates continued rate cuts in China following the surprise reduction in the People’s Bank of China’s (PBOC) 1-year MLF rate in July. The agency points to deflationary pressures in China, with falling producer prices, export prices, house prices, and core CPI inflation. Fitch has revised its inflation forecast for China, projecting a rate of 0.5% in 2024 and additional rate cuts in 2024 and 2025.
In contrast, the Bank of Japan (BOJ) has taken a more hawkish stance, raising rates more aggressively than expected in July. With core inflation above the BOJ’s target for 23 consecutive months and signs of wage growth, Fitch believes that a “virtuous wage-price cycle” is underway in Japan. The agency forecasts the BOJ’s policy rate to reach 0.5% by the end of 2024 and 0.75% in 2025, with a long-term target of 1% by the end of 2026.
Overall, Fitch’s analysis underscores the divergent monetary policy paths of major central banks, with the Fed adopting a cautious approach to easing, China pursuing further rate cuts to combat deflation, and the BOJ maintaining a more aggressive stance in response to improving economic conditions. The implications of these policy decisions are expected to have global ramifications in the coming years.
