All along, the US Federal Reserve has maintained the economic data hasn’t justified cutting rates early and risking letting the inflation genie back out of the bottle.

Even though inflation is close to – and by some measures already below – its 2% medium-term target, and by keeping rates at 5.5% it is risking breaking something in the economy or the financial system, the Fed has been fixated on the employment statistics which so far have proved robust.

That policy now increasingly looks to have been a mistake, as last week’s jobless claims, ISM hiring intentions and last but by no means least non-farm payrolls data all showed a sharply-slowing labour market.

Payrolls rose by just 114,000 instead of 175,000 as predicted, while the unemployment rate rose to 4.3% instead of sticking at 4.1% raising concerns over the robustness of consumer spending which has been the driving force behind the US’s ‘exceptionalism’.

‘A September rate cut is in the bag and the Fed will be hoping that they haven’t, once again, been too slow to act,’ commented Seema Shah, global strategist at Principal Asset Management.

Here in the UK, the Bank of England succumbed to pressure and lowered its benchmark interest rate by one quarter of a percentage point from 5.25% to 5% last week, although the decision was finely balanced with the smallest possible majority voting in favour.

Given the US experience, we suspect while the Monetary Policy Committee might have wanted to hold off until December to cut again, it is likely to bring that decision forward to its next meeting in September, especially if this week’s retail sales figures and PMI survey and next week’s unemployment, inflation and GDP (gross domestic product) reports point to a weakening backdrop. 

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