The cut in the cost of money has finally arrived. And it was significant. Maxi cut of 50 points yesterday by the Fed. Now we need to see what the consequences will be on other economic data, which are also crucial for the US election campaign. Since 2020, the American central bank, led by Jerome Powell, has been proceeding with progressive increases in interest rates to fight inflation. With higher rates, in fact, it becomes more expensive to take out a mortgage to buy a house, or to open a loan to start a new company and make investments: the result is that prices cool down, inflation falls but the economy tends to slow down. It is the same game that, in Europe, Christine Lagarde’s ECB has played.
Now in the US (but also in the Eurozone) inflation has fallen, returning to around 2% (remember that in the summer of 2022 it had exceeded 9% on both sides of the Atlantic). Many analysts in recent months have observed that the surge in prices was mainly due to the war in Ukraine, with energy costs skyrocketing, and to speculative phenomena that triggered a cascading growth spiral on all consumer goods. Hence the criticism, even very harsh, of central banks: you have fought against the wrong enemy by depressing the real economy. Now we are in another phase. Prices have fallen, very difficult to say whether due to the rise in the cost of money or a changed global scenario. But that’s how it is. The question now is whether the real economy will recover or not.
The situation here is different between the United States and Europe. The overseas economy is doing quite well and in fact many believed that rates could be left at a safe level against inflation. In Europe, however, stagnation is clear. Countries with Germany are in recession, with the consequences also falling on their partners. Like Italy, which exports to Germany and has in fact seen its export data plummet. For this reason, the pressure on the ECB is strong. There has been an initial cut, more cautious than the Fed (-0.25%). We need to understand if there will be others or if the inflationary obsession will prevail even in the face of a normalization of energy prices and an asphyxiated economy.
But returning to the United States, the interest rate game is intertwined with the last, decisive, part of the electoral campaign for the November 5 elections. Donald Trump has ordered Powell not to touch the rates until the vote so as not to favor the Democrats, with possible positive consequences on the real economy, despite the fact that the Fed is an independent authority and despite the fact that Powell was put in charge of the Central Bank by Trump himself. Moreover, already in the 2016 campaign against Barack Obama, the tycoon had targeted the then Fed president Janet Yellen for the same reason.
And now what will happen? By the end of the year, the Fed should cut the cost of money by another quarter of a point, to continue to support the economy that, although satisfactory, is showing some signs of slowing down. This is what is called a “soft landing” in jargon, a soft landing after a long period of restrictive policies. At the moment it seems that the US can afford it. The situation seems more difficult here, where the cut has begun, but where the specter haunting Europe is that of recession.
