Major Banks Predict September Fed Rate Cut

According to Reuters, Barclays and BNP Paribas both anticipate the U.S. Federal Reserve will implement a fed rate cut in September, followed by another in December. This prediction comes after Chair Jerome Powell signaled a shift toward an easing bias during his speech at the Jackson Hole economic symposium. The brokerages issued separate notes on Friday outlining their expectations for monetary policy easing.

The anticipation of a fed rate cut reflects changing market expectations following Powell's comments, which suggested increased openness to accommodative policy. Financial institutions are now adjusting their forecasts based on the Fed's perceived willingness to respond to economic conditions despite the political pressures surrounding the central bank.

"Both brokerages expect Fed to cut rates in September and December," according to Reuters reporting from Rashika Singh in Bengaluru.

Global Central Bankers Fear Political Contagion

The annual Jackson Hole symposium revealed deep concerns among global central bankers that the political storm surrounding the Federal Reserve might spread to other institutions. According to Reuters reporting from Francesco Canepa, Howard Schneider and Leika Kihara, central bankers from around the world expressed apprehension that attacks on Fed independence could establish a dangerous precedent.

U.S. President Donald Trump's efforts to reshape the Fed to his liking and pressure it into interest rate cuts have raised fundamental questions about whether the world's most powerful central bank can preserve its independence. The situation has created uncertainty about the timing and magnitude of any future fed rate cut decisions, as political considerations may influence what should be technocratic determinations.

• Trump has pressured Chair Powell to resign
• Efforts to oust Governor Lisa Cook underway
• Political pressure may influence future fed rate cut decisions
• Global central bankers fear similar political attacks

The Stakes of Central Bank Independence

Conversations with a dozen central bankers at Jackson Hole revealed that a scenario where the Fed's ability to combat inflation is jeopardized by loss of independence is viewed as a direct threat to global economic stability. European Central Bank policymaker Olli Rehn noted that "the politically motivated attacks on the Fed have a spiritual spillover to the rest of the world, including Europe."

The independence of central banks has been a cornerstone of global economic stability since Fed Chair Paul Volcker vanquished high inflation 40 years ago. A fed rate cut motivated by political pressure rather than economic necessity could undermine this hard-won credibility and establish a dangerous precedent that might lead to higher inflation globally.

"It's a reminder that independence should not be taken for granted," said Bundesbank President Joachim Nagel. "We have to deliver on our mandate and make clear that independence is the conditio sine qua non for price stability."

Market Reactions and Economic Implications

Despite the political turmoil, markets have not yet registered deep concerns about the Fed's independence. U.S. equity markets remain strong, and there hasn't been the sort of jump in Treasury yields or inflation expectations that would typically indicate concerns about central bank credibility. However, this calm may reflect complacency rather than confidence.

The timing of any fed rate cut is particularly sensitive given the political context. While Barclays and BNP expect cuts in September and December, these moves will be closely scrutinized for signs of political influence. A premature fed rate cut motivated by political pressure rather than economic conditions could trigger market volatility and undermine the Fed's inflation-fighting credentials.

1. Equity markets showing strength despite political pressures
2. Treasury yields remain relatively stable
3. Inflation expectations contained for now
4. Future fed rate cut decisions will be closely watched for political influence

Global Preparations for Potential Fallout

Central banks around the world have already started preparing for potential fallout from Fed political interference. According to Reuters, they are telling lenders under their supervision to watch their exposure to the U.S. currency. This precautionary measure reflects concerns that political influence over Fed decisions, including any potential fed rate cut, could undermine confidence in dollar-denominated assets.

The concern is that if the Fed's independence is compromised, investors might demand a greater premium to own U.S. bonds and reassess the status of Treasury securities as the bedrock of the global financial system. This could have profound implications for global financial stability and the cost of borrowing worldwide.

Historical Precedents and International Examples

The current situation echoes historical precedents where governments have attempted to influence central bank policies. In Japan, the late Prime Minister Shinzo Abe criticized then central bank governor Masaaki Shirakawa for doing too little to beat deflation and hand-picked Haruhiko Kuroda in 2013 to implement massive asset purchases. According to one source familiar with BOJ thinking, "It's as if Trump learned from Abe."

Similar patterns have emerged in Europe. The European Central Bank faced accusations of bankrolling governments when it launched its bond-buying scheme a decade ago and survived multiple court challenges. Right- and left-wing parties in Italy, Germany and France have periodically criticized the central bank, while countries like Latvia and Slovenia have experienced political interference in central bank appointments.

The Institutional Safeguards Protecting Fed Independence

Despite political pressures, the Federal Reserve has significant institutional protections that may help preserve its independence. While Trump can name a new chair when Powell's term ends in May, he needs more departures among the Fed's seven-member board for his appointees to gain majority control. The Fed's network of 12 regional reserve banks, whose leaders take turns voting on interest rate policy, provides a further counterweight to political influence.

These institutional safeguards mean that any fed rate cut decision will likely remain based on economic considerations rather than purely political ones, at least in the near term. However, the long-term independence of the institution depends on maintaining these protections against political encroachment.

The Economic Rationale for Rate Cuts

From an economic perspective, there are legitimate reasons why a fed rate cut might be appropriate. Inflation has moderated from its peaks, and some economic indicators suggest slowing growth. The Fed's dual mandate of price stability and maximum employment might justify accommodative policy if economic conditions deteriorate.

However, the timing and magnitude of any fed rate cut must be determined by economic data rather than political pressure. The credibility of the Fed depends on maintaining this distinction, even in the face of significant political headwinds. Markets will be watching carefully to ensure that any fed rate cut is justified by economic conditions rather than political expediency.

Conclusion: Navigating Political Pressures While Maintaining Credibility

The Federal Reserve faces an unprecedented challenge in navigating political pressures while maintaining its credibility and independence. The expected fed rate cut in September will be closely scrutinized for signs of political influence, with global implications for central bank independence everywhere.

As Maury Obstfeld, senior fellow at the Peterson Institute for International Economics and former IMF chief economist, noted: "Taking over the Fed is one development that would set a very bad example for other governments." How the Fed handles political pressure while making decisions about a potential fed rate cut will have ramifications far beyond American shores, potentially affecting global economic stability for years to come.

The coming months will test whether the Fed can maintain its independence while responding appropriately to economic conditions. The world's central bankers are watching closely, aware that the outcome could determine their own future independence and ability to maintain price stability in their respective economies.