Fed to cut rates at last after drop in inflation

The US central bank looks set to cut interest rates next week after inflation in the world’s biggest economy fell to a three-and-a-half-year low.

Official data yesterday showed consumer price inflation dropped from 2.9pc in July to 2.5pc in August, beating forecasts that it would hit 2.6pc. It was last lower in February 2021.

The US Federal Reserve now looks certain to cut rates on Wednesday, for the first time since 2020.

The Bank of England’s next rate-setting meeting takes place a day after the Fed though it is 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 its officials meet today.

All three central banks are looking to ease the pain of high borrowing costs, which were hiked as they battled surging inflation. In the US, inflation peaked at 9.1pc two years ago.

The Fed is now keen to try to ensure a ‘soft landing’ – meaning that inflation can be brought under control without causing an economic downturn.

Expectations of a rate cut intensified last month when Fed chief Jerome Powell said ‘the time has come for policy to adjust’. But signs of a weakening jobs market have alarmed some on Wall Street who fear it may be acting too late and may have to enact a supersize rate cut of half a percentage point.

However, experts said yesterday’s inflation figures would make the Fed more cautious. That was because an underlying month-on-month measure of core inflation – stripping out food and energy – was 0.3pc, up from 0.2pc in July.

New York’s Dow Jones index was initially trading lower in the wake of the figures.

‘This isn’t the report the market wanted to see,’ Seema Shah, the chief global strategist at Principal Asset Management, said yesterday.

Isaac Stell, of investment platform Wealth Club, said: ‘While core US inflation came in a touch too warm over the summer, inflation more broadly continues to trend lower, easing enough for the Fed to begin cutting interest rates.

‘The big debate now is whether it plumps for a 0.25pc or 0.50pc rate cut.

‘We suspect the Fed will be wary of taking the brakes off 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 vice-president to President Joe Biden.

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