As recently as 30 July the US Federal Reserve decided to leave interest rates unchanged. At the time, Chair Powell argued that incoming economic data had provided no further insight into the timing of a possible rate cut. Instead, Powell argued that the FOMC is well positioned to “wait for greater clarity” regarding the economic outlook before adjusting interest rates.
Over the past 6 weeks, the US economic data has provided the Federal Reserve with a lot more insight, ensuring that the FOMC will very likely decide to cut interest rates by 25bps when they next meet on 17 September as well as signal that further interest rate cuts are anticipated over the coming months.
Three important factors have led to this shift in the Federal Reserve’s approach to monetary policy.
- First, while the Trump Administration has continued to excerpt pressure on the Federal Reserve to cut interest rates, the decision by Chris Waller and Michelle Bowman (both members of the FOMC) to publicly disagree with the Fed’s rate decision on 30 July has added significant additional pressure.
- Second, the recent US labour market data (together with revisions to the historical data) indicates that labour market conditions have weakened considerably in recent months. And while the US economy is still adding jobs, the average number of job gains have dwindled to less than 30 000 a month during the past four months.
- Third, following President Trump’s Liberation Day tariff announcements in early April 2025 there was an expectation that the higher import tariffs would push US consumer inflation significantly higher. However, the most recent inflation data suggests that companies are currently absorbing a larger than expected portion of the higher import duties and that the impact on retail prices is relatively modest. It is, obviously, still very early in the process to evaluate the full impact of higher tariff, but many analysts have expressed less concern about US inflation becoming entrenched at a higher level.
Understandably, the combination of increased political pressure, a weaker labour market and a more benign inflation outlook have fueled expectations of successive interest rate cuts over the next few months. Importantly, this has also kept the US Dollar under pressure. In fact, the US Dollar has weakened by a further 2.7% against the Euro since end of July 2025 and has lost a substantial 11.9% of its value against the Euro since the beginning of the year - which largely explains the relative strength of the Rand as well as other emerging market currencies over the same period. Furthermore, these currency trends now appear likely to remain a factor over the coming months as markets adjust to a more aggressive US interest rate cutting cycle.
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Source: Analytics Consulting FX Solutions, Macrobond.