Fitch Ratings: The Federal Reserve will slowly ease its policy, the work of resisting inflation is still unfinished

International rating agency Fitch stated in a report that, measured by historical standards, the easing cycle of the Federal Reserve when it began cutting interest rates at the September policy meeting will be "moderate."

In its September global economic outlook report, Fitch predicted that the Federal Reserve will cut interest rates by 25 basis points at the September and December meetings, followed by cuts of 125 basis points and 75 basis points in 2025 and 2026, respectively.

Fitch pointed out that this means a total of 250 basis points cut over 25 months in 10 increments, and added that the median cumulative rate cut from peak to trough in Federal Reserve easing cycles since the mid-1950s is 470 basis points, with a median duration of 8 months.

The report stated: "We expect the Federal Reserve to proceed with loose monetary policy at a relatively moderate pace, one reason being that there is still work to be done on inflation issues." This is because the CPI inflation rate remains above the Federal Reserve's target level of 2%.

Fitch also noted that the recent decline in core inflation (excluding food and energy prices) mainly reflects a decrease in car prices, which may not be sustained.

According to a report from the U.S. Department of Labor on Wednesday, U.S. CPI rose by 2.5% year-on-year in August, lower than the expected 2.6%, marking the lowest increase in three and a half years; it rose by 0.2% month-on-month. Core CPI, excluding volatile food and energy prices, rose by 0.3% for the month, slightly higher than the expected 0.2%; year-on-year growth remained at 3.2%, in line with forecasts.

Fitch also pointed out, "The inflation challenges faced by the Federal Reserve over the past three and a half years may also keep FOMC members cautious. The time required to suppress inflation is much longer than expected, and central banks around the world have shown diverging understandings of inflation drivers."

In Asia, Fitch stated, "The Bank of Japan is moving against the global trend of loose policies, with rate hikes exceeding our expectations in July. This reflects its increasing confidence that inflation is now firmly entrenched."

Fitch stated that due to core inflation remaining above the Bank of Japan's target for 23 consecutive months, and companies preparing to offer "sustained" and "substantial" wages, this situation is very different from the "Lost Decade" of the 1990s when wages failed to grow amid persistent deflation.

This aligns with the Bank of Japan's goal of a "wage-price virtuous cycle," enhancing the Bank of Japan's confidence in continuing to raise rates to neutral levels.

Fitch expects that the Bank of Japan's policy rate will reach 0.5% by the end of 2024, 0.75% in 2025, and added: "We expect the policy rate to reach 1% by the end of 2026, higher than market expectations. A more hawkish stance by the Bank of Japan may continue to have global implications."