Can ASX 200 investors expect a Fed interest rate cut in September?

A Fed interest rate cut in September would offer some tailwinds for the ASX 200 in Q4.

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S&P/ASX 200 Index (ASX: XJO) investors have been waiting patiently for central banks to finally begin cutting interest rates.

Very patiently.

Here in Australia, the Reserve Bank of Australia first moved to contain fast-rising inflation on 4 May 2022. At the time, the official cash rate stood at a historic low of 0.10%. The RBA then lifted that by 0.25% to 0.35%.

By the time the smoke cleared, and following a final 0.25% hike on 8 November 2023, the cash rate stands at the current 4.35%.

Now with inflation proving extra sticky down under, ASX investors are largely resolved that RBA interest rate cuts are likely off the table until 2025.

But how about the US Federal Reserve?

While Fed easing won't lower the costs for Aussie mortgage holders, it should offer some tailwinds for many ASX 200 stocks.

The Fed, as you may know, made its own first rate hike on 17 March 2022, boosting the official funds rate by 0.25% to bring it in the range of 0.25% to 0.50%. The final 0.25% increase came on 26 July 2023.

That brought the official US rate to the current 5.25% to 5.50% range, the highest level in over 20 years.

Will ASX 200 investors see Fed interest rate easing in September?

Circling back to our headline question then, can ASX 200 investors expect some interest rate relief from the Fed this year?

As for the Fed's next meeting on 31 July, this looks unlikely.

Speaking at the Senate Banking Committee yesterday (overnight Aussie time), Federal Reserve chair Jerome Powell said, "More good data would strengthen our confidence that inflation is moving sustainably toward 2%."

While Powell stressed that he wasn't providing any timelines for upcoming interest rate moves, he did open the door for potential easing in September, when the Federal Open Market Committee (FOMC) meets again.

"Elevated inflation is not the only risk we face," Powell said (quoted by Bloomberg).

"The latest data show that labour-market conditions have now cooled considerably from where they were two years ago. And I wouldn't have said that until the last couple of readings," Powell added.

What are the experts saying?

So, will the ASX 200 enjoy lower US interest rates in the final quarter of 2024?

Derek Tang, an economist at LH Meyer, said a weakening US jobs market is a key lever to "spur" Powell into action.

"His focus is squarely on the labour market. Further softening in the labour market, even if further disinflation is not delivered, is enough to spur action," Tang said.

Bloomberg economist Anna Wong added:

Powell's remarks to lawmakers are rife with references to labour-market risks. The Fed now appears to be placing equal weight on the employment leg of its dual mandate in contrast to the past two years, when it explicitly prioritised price stability.

Given our forecast for the unemployment rate to climb to 4.5% in 4Q, we expect that by year-end the Fed will be prioritising the employment leg of its mandate.

The S&P 500 Index (SP: .INX) closed up 0.1% overnight following Powell's address.

The ASX 200 is down 0.5% today.

Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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