United States: Fed cuts interest rates

The US Federal Reserve has cut interest rates by 50 basis points, signaling the central bank’s confidence that its war against inflation is coming to an end. How far and how fast the Fed cuts rates moving forward remains to be seen.

Fed Chair Jerome Powell told lawmakers earlier this year that the era of near-zero interest rates is likely over, the central bank projected in June that the median interest rate would drop to 4.1% in 2025 and 3.1%in 2026.

The Fed further lowered its median rate forecast Wednesday to 3.4% next year and 2.9% in 2026, as well as in the long run, according to new economic projections.

“This would only be the first cut of a rate-cutting cycle. The size and frequency of future cuts will give us a better understanding of whether the Fed believes they are behind, or ahead of, ‘the curve,’” said Jonathan Ernest, an economics professor at Case Western Reserve University.

The jobless rate ticked up to 4.3% in July and clocked at 4.2% last month. That’s relatively low by historical standards but still a sign of labor market “cooling” the Fed had been watching for as it waited to cut rates.

While some economists believe the Fed could have started cutting rates in July, the next few months are critical as the central bank attempts to bring the economy in for a “soft landing,” maintaining its dual mandate of low inflation and maximum employment as it brings down rates.

 

Tanker owners await OPEC Plus announcement

OPEC Plus is scheduled to hold its next meeting on Sunday and its decisions on production strategy will have far reaching implications for the tanker owners.

According to Seatrade Maritime News, sector analysts say the picture in far from clear. In its weekly report, Gibson suggests that there could be three possible outcomes.

1- OPEC Plus members could decide to continue with the production cuts in place today.

2- They could implement further cuts, allowing oil producers outside the cartel to boost their market share.

3- They could decide to ease voluntary production cuts to meet the wishes of members hoping to boost oil revenue streams. 

OPEC Plus member states account for more than 40% of global crude tanker trade where rising oil demand in China is likely to underpin crude oil growth of 2.2 million barrels per day this year, according to the projections.

Crude demand is also climbing in other non-OECD countries, notably India, and other countries in Asia, Middle East, and Latin America, Gibson said.

However, the broker notes that few analysts are as bullish about oil demand prospects.

The International Energy Agency (IEA), for example, reckons that likely growth could reach 1.1 million barrels per day, just half the OPEC Plus estimate. The IEA reckons that demand will grow more slowly now that the post-Covid surge has come to an end.

Meanwhile, declining oil demand in Europe is likely to reduce OECD demand which, the IEA suggests, could fall by 140,000 bpd this year. This is the result of the industrial downturn and a mild winter.

Gasoil demand in all three OECD regions over the first quarter fell by 330,000 bpd year-on-year.

Gibson points to lower oil prices, with Brent crude now trading at around US$81-83 a barrel, down from an average of US $89 in April.

These lower prices may suggest a current oversupply, a factor supported by weaker demand growth. These prevailing market fundamentals may deter OPEC Plus from loosening their production cuts too soon, Gibson said.