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Are you curious about the Federal Reserve's next move on interest rates? Speculations are rife, but what's the likelihood of a significant cut in September? Let's unravel this economic enigma together.
The Fed's decision to delay rate cuts until September has left investors on edge. The burning question is: will the cut be a modest 25 basis points or a bolder 50 basis points? With no policy meeting in August, policymakers will have over six weeks to analyze the data before making their decision.
Hle Meta, the head of economic research at St. James's Place, believes the bar for a 50-point cut is incredibly high. "We've just had strong Q2 GDP numbers, and inflation in some areas is still sticky," Meta explains. "The labor market is still relatively strong, so a 50 basis point move seems a bit of a stretch."
Given the current economic scenario, Meta suggests that a 25 basis point cut is the most likely outcome. "The market was probably pricing out any cuts this year, so a sudden flip to a 50 basis points move seems unrealistic."
Meanwhile, the Bank of England's policy meeting is tomorrow, and opinions are divided. The chances of a cut are currently at 64%. Meta notes, "The bulk of the data since the last meeting has been marginally hawkish. However, the momentum for a rate cut comes from the lack of communication about the improving inflation picture globally."
Fresh inflation readings from Europe reveal a complex situation. While energy inflation ticked up slightly, services inflation, which constitutes a significant part of overall inflation, ticked lower. "Overall, we've seen a significant deterioration in economic sentiment in Europe, particularly from Germany," Meta observes. "Another cut by the ECB in September wouldn't be out of the question."
In Japan, the central bank has raised rates to their highest since 2008, causing bond yields and shares to soar. "The move was slightly earlier than anticipated," Meta says. "A stronger Yen will mean they can import some element of deflation, but they are in a completely different space compared to most other developed markets."
As we wait for the Fed's decision, one thing is clear: the global economic landscape is a complex puzzle with many moving parts. Will the Fed opt for a cautious approach or take a bold step? Stay tuned to find out how this story unfolds.
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