Kamala Harris’s hopes of victory in the looming US presidential election have been given a boost by mounting expectations that the US Federal Reserve will cut interest rates from as early as September.
As Democrats gather for the party’s national convention in Chicago starting on Monday, economists on Wall Street said the world’s most powerful central bank was poised to begin a cycle of interest rate cuts before the end of the year.
After a rollercoaster month in financial markets amid fears of a potential US recession, a majority of economists polled by Reuters said they did not expect a downturn to materialise, and that the Fed would cut borrowing costs by 0.25 percentage points at each of its remaining meetings in 2024.
It comes after the heads of three regional Federal Reserve banks signalled growing readiness for the start of a rate-cutting cycle to help ease pressure on households and businesses from high borrowing costs.
The president of the Minneapolis Federal Reserve, Neel Kashkari, said it was appropriate to discuss potentially cutting interest rates from as early as September because of a weakening jobs market.
“The balance of risks has shifted, so the debate about potentially cutting rates in September is an appropriate one to have,” he said in an interview with the Wall Street Journal on Monday.
His comments followed similar remarks by the head of the St Louis Fed, Alberto Musalem, and the Atlanta Fed president, Raphael Bostic.
Yields on US government debt fell back on Monday as investors bet on the rising chances of a Fed rate cut from as early as next month, ahead of what is expected to be a closely fought presidential election between Harris and Donald Trump on 5 November.
With the markets awaiting a speech by US Fed chair, Jerome Powell, at the central bank’s annual Jackson Hole meetings on Friday in which he is expected to lay out a downward future path for rates, the yield on benchmark 10-year US Treasury bonds fell by 0.2 basis points to 3.89%.
Based on trading in financial markets, investors see about a 76% chance of a 0.25 percentage point cut in interest rates in September.
Krishna Guha, the vice-chair of Evercore ISI, said: “We expect [Powell] will use his Jackson Hole speech to explain why the Fed is now sufficiently confident inflation is heading back durably to 2% to begin dialling back rates soon – [from] September – and [to] provide a basic framework for the cutting cycle ahead.”
The US annual inflation rate dipped below 3% in July for the first time since 2021, offering relief to investors after figures earlier this month showed an unexpectedly sharp slowdown in the US jobs market, raising fears of a possible US recession.
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Financial markets had been betting on the Fed being able to navigate a soft landing from a period of elevated borrowing costs, deployed to tackle the surge in US inflation after the lifting of Covid restrictions and global energy crisis triggered by Russia’s invasion of Ukraine.
However, the weak jobs data sparked a rout in global financial markets earlier this month, sending shares on Wall Street and in London sliding amid mounting fears of a hard landing for the world’s largest economy.
Stock markets have recovered since amid growing hopes the Fed was gearing up for a first cut in interest rates since March 2020, when the Covid pandemic spread around the world.
Mohit Kumar, the chief economist at Jefferies, said: “We expect Powell to provide a sense of calm to the markets, indicating that the Fed is moving towards a rate cut but there is no need to panic.
“He would probably acknowledge the slowdown in the employment picture but indicate that the broader economy still remain resilient.”