Interest rate cut sends the wrong signal
Lena Dräger, Research Director of the Monetary Macroeconomics Group at the Kiel Institute, comments on the expected decision by the US Federal Reserve to lower its policy rate again:
"The Federal Reserve (Fed) is likely to ease its monetary policy again and cut the policy rate in its interest rate decision today. The reason given for the interest rate cut is the slowdown in labor markets, which could be a sign of an impending economic downturn. However, given the stable economic situation to date and the high level of economic uncertainty, an interest rate cut would send the wrong signal and could be interpreted as a concession to the ongoing political pressure from the Trump administration, which has been calling for sharp interest rate cuts for months.
Even if job growth is slowing, both GDP growth and private consumption have been stable since the beginning of the year, with growth rates well above those of other industrialized countries. At the same time, inflation remains above the 2 percent target and has risen slightly recently. In addition, the latest data on the labor market and inflation could not be published due to a shutdown of the relevant statistical agencies, the Bureau of Labor Statistics (BLS) and the Bureau of Economic Analysis (BEA).
Fed Chairman Jerome Powell has so far shown a great deal of backbone and calm in this political conflict. He could use the data blackout, which is a direct consequence of the shutdown induced by the government, as an argument for keeping interest rates steady for the time being. With his term expiring in spring 2026, he should use the remaining time to focus strongly on price stability and thus bolster market participants' confidence in the Fed and the US dollar."
