America’s fight with inflation has been won – just in time for a bigger battle
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Version 0 of 1. The Fed is likely to cut base rates this month – but its decision will come the day after an explosive US election There could be recriminations, protest marches and even social unrest on US city streets when Federal Reserve officials meet at their Washington HQ a day after the election of a new president on 5 November. The election of Kamala Harris could bring supporters of Donald Trump on to the streets, while a victory for Trump could provoke widespread anger and condemnation among Democrats. The Fed is supposed to behave as if it lives outside the political bubble, away from the daily jousting in Congress and the White House. An era-defining election will be more difficult to ignore. Nevertheless, the Fed is expected to please whoever wins by cutting interest rates and signalling several more reductions, after figures showed a two-year battle against inflation had been largely won in the summer. Markets currently expect Fed boss Jerome Powell to announce a 0.25-percentage-point reduction in interest rates, to a spread between 4.5% and 4.75%, at a press conference on 7 November. There are doubts among some Fed officials about whether the defeat of inflation has been permanent and lasting. They worry that businesses will jack up prices by more than the Fed’s 2% annual inflation target in response to a tight labour market that has kept wage increases steady even as inflation has fallen. However, the most recent jobs data showed the unemployment rate rising from 3.4% to 4.1% over the last 18 months, after hitting 4.3% in July. The closely watched non-farm payroll report on Friday showed the US economy had added just 12,000 jobs in October. That was well below expectations for 113,000. There were special factors at play – the impacts of hurricanes Helene and Milton both affected the month, and a strike at Boeing also had an effect. But even so, analysts were aware of these factors when making their forecasts. The weak data means that a larger 0.5-percentage-point reduction in the cost of borrowing is possible. A bigger cut would be welcomed by most US workers, whose wage increases have yet to reverse a noticeable slide in living standards. British workers are similarly hard-pressed and looking forward to a rate cut by the Bank of England to ease mortgage and rental costs. Policymakers at the Bank’s Threadneedle Street HQ also meet on 6 November and, like Fed officials, deliver their verdict on 7 November. There is a strong chance the Bank will cut interest rates after governor Andrew Bailey told the Guardian that it could become a “bit more aggressive” in doing so if inflation continued to cool. That was before the latest official figures showed UK inflation had fallen to 1.7% in September – below the Bank’s 2% target and the lowest level in three and a half years. The Bank will have a big advantage over the Fed, and that relates to the political backdrop for its decisions. While the Fed will be in the dark about the tax and spending policies of the incoming president, Labour’s budget last week gives the Bank a good view of the government’s finances five years ahead. Sign up to Observed Analysis and opinion on the week's news and culture brought to you by the best Observer writers after newsletter promotion By some measures, the budget restricts government spending, giving Bailey and his colleagues room to cut rates at a faster pace. The only cross-current comes from investment spending, which Rachel Reeves said would rise substantially after relaxing government borrowing rules. A dash for growth could put pressure on prices if it leads to a jump in demand for skilled workers, and those workers demand higher pay in a bidding war between employers. This scenario may mean the Bank judges that rates need to stay higher for longer. Yet investment is likely only to rise slowly, whatever ministers say about the urgency – allowing inflation to remain low, wages to increase only modestly and interest rates to continue on their downward path. It follows that, on both sides of the Atlantic, these two economies could be running neither too hot or too cold in a year’s time, having regained their sense of balance after a disorientating period of rocketing inflation. The only blot on the landscape is the US election, which could wreck this careful choreography. A disputed result, or a Trump victory, will probably send markets into a spin, upsetting the return to something like normality. |