Why Do Economic Experts Fear US Interest Rates Staying Stable?

SadaNews - Investhing.com reported in an extensive report that the decision by the US Federal Reserve (central bank) to keep interest rates unchanged until the end of the year is not merely a technical step in monetary policy, but opens the door to a complex series of economic and financial risks, raising questions about the central bank's ability to balance the equation of rising inflation and a weak labor market.

Despite markets pricing in an almost complete cut in interest rates in September, the report warned that the continued freeze may exacerbate uncertainty and present the US economy with deep challenges that exceed short-term expectations, at a time when inflationary pressures from goods and services are rising alike.

Inflation.. Concern Despite the Freeze

According to Morgan Stanley analysts, as reported by the platform, the Consumer Price Index figures for July showed "the rigidity we expected, but the composition was different: goods continued to show resilience without rising, while services experienced acceleration."

The report added that goods affected by tariffs "remained resilient," but the surprise came from service inflation, as airfare and hotel prices rose after months of deflationary pressures.

Morgan Stanley warned that "both the core Consumer Price Index (3.1% year-on-year in July) and the core Personal Consumption Expenditures Index (expected at 2.9% year-on-year) are still at the same pace recorded last year - and thus any further acceleration in goods inflation due to tariffs during the summer will keep inflation above the Fed's target worryingly."

The Labor Market at Stake

The report emphasized that the August jobs report will be extremely important. It clarified that the Fed may "ignore the weak data from May and June if job growth accelerates and the unemployment rate stabilizes at 4.2% to 4.3%."

Conversely, a "sharp slowdown in employment could push the Fed to adopt a view that the labor market is far weaker than expected, thus reinitiating a path of monetary easing."

Analysts indicated that even with inflation remaining above target, "the possibility of a rate cut remains from a risk management perspective."

Global Implications

According to Investhing.com, Morgan Stanley emphasized that US monetary policy will remain pivotal globally, noting that any decline in recession risks within the United States could delay easing steps in the Eurozone.

As for Japan, "improving US data could prompt the Bank of Japan to consider raising interest rates later this year," reflecting the severe interconnectedness among major monetary policies.

In conclusion, the report stated that "the global economy remains contingent on the Federal Reserve's decisions, while risks are increasing on both the inflation and growth fronts together."

Source: US Agencies