The current landscape of global monetary policy is a complex web of decisions, expectations, and economic realities. As central banks navigate through high inflation and slow recovery post-pandemic, the Federal Reserve’s projected rate cuts have sparked significant interest and debate among economists and market participants. In its September economic outlook, Fitch Ratings provided critical insights into this unfolding situation, highlighting both the cautious approach of the Fed and the diverging paths of monetary policies in Asia.
Fitch’s analysis suggests that the Federal Reserve’s forthcoming easing cycle is likely to be “mild” compared to historical trends. According to forecasts, we may witness a 25-basis-point cut during the Fed’s policy meetings in September and December of this year, followed by a gradual series of additional cuts across 2025 and 2026. This easing is expected to accumulate to a total of 250 basis points via 10 moves over 25 months, a significantly lower figure than the median reduction of 470 basis points recorded in previous easing cycles since the mid-1950s.
The rationale for this restrained approach stems from persistent inflationary pressures. While the consumer price index (CPI) showed a year-on-year increase of only 2.5% in August—its lowest mark since February 2021—it still exceeds the Fed’s preferred target of 2%. Moreover, the recent decline in core inflation is primarily attributed to a drop in vehicle prices, an unstable factor that could revert in the future. Fitch underscored the Fed’s cautious stance, noting that the complexities of inflation and its drivers might cause FOMC members to adopt a more measured approach to rate adjustments.
Inflation in the U.S. has exhibited fluctuations, with core inflation holding steady at 3.2% over a 12-month period. The detailed analysis reveals that wage growth and supply chain issues have complicated the Fed’s ability to predict and manage inflation trends. According to Fitch, the drawn-out battle against inflation has uncovered significant gaps in central banks’ understanding, contributing to a need for extreme caution.
Fitch’s report also sheds light on the differing inflationary environments across the globe, reinforcing the notion that economic conditions cannot be treated uniformly. As the U.S. refrains from aggressive cuts, central banks in several Asian countries are implementing distinct measures tailored to local economic conditions.
The People’s Bank of China (PBOC) is an interesting case in point. Fitch reported that the PBOC’s unexpected rate cut in July, when it lowered the 1-year medium-term lending facility (MLF) rate from 2.5% to 2.3%, was a strategic move to counter persistent deflationary pressures. As bond yields fall and core CPI inflation precariously hovers at a mere 0.3%, Fitch forecasts a gradual series of rate cuts in China to combat these downturns. The agency predicts that China’s inflation rate may decline even further, projecting it to be at 0.5% in 2024.
In stark contrast to other regions, Japan is breaking away from the wave of easing, as the Bank of Japan (BOJ) has taken steps to raise rates—with expectations that the benchmark policy rate could reach 0.75% by 2025. This shift appears to be fueled by consistent core inflation exceeding the BOJ’s target over 23 months, suggesting that Japan’s economy is beginning to reflect resilience in wage growth and inflation dynamics, a significant departure from the deflationary cycle of the past.
The global monetary policy sphere is characterized by intricacies and regional disparities. As Fitch details, the Fed’s cautious easing cycle reflects a broader trend of central banks grappling with varying inflationary challenges. While the U.S. may adopt a careful, gradual approach to rate cuts, countries like China and Japan demonstrate that responses must be tailored to the local economic realities. The coming years promise to be pivotal as monetary authorities strive to navigate uncharted territories in macroeconomic management, making the consequences of these decisions pivotal not just for their respective countries, but for the interconnected global economy as a whole.