Finance

Fed will ease slowly as there is ‘still work to do’ on inflation: Fitch

Published

2 months ago

September 13, 2024

The U.S. Federal Reserve’s easing cycle will be “mild” by historical standards when it starts cutting rates at its September policy meeting, ratings agency Fitch said in a note.

In its global economic outlook report for September, Fitch forecast 25-basis-point cut each at the central bank’s September and December meeting, before it slashes rates by 125 basis points in 2025 and 75 basis points in 2026.

This will add up to a total 250 basis points of cuts in 10 moves across 25 months, Fitch noted, adding that the median cut from peak rates to bottom in previous Fed easing cycles going up to the mid-1950s was 470 basis points, with a median duration of 8 months.

“One reason we expect Fed easing to proceed at a relatively gentle pace is that there is still work to do on inflation,” the report said.

This is because CPI inflation is still above the Fed’s stated inflation target of 2%.

Fitch also pointed out that the recent decline in the core inflation — which excludes prices of food and energy — rate mostly reflected the drop in automobile prices, which may not last.

U.S. inflation in August declined to its lowest level since February 2021, according to a Labor Department report Wednesday.

The consumer price index rose 2.5% year on year in August, coming in lower than the 2.6% expected by Dow Jones and hitting its lowest rate of increase in 3½ years. On a month-on-month basis, inflation rose 0.2% from July.

Core CPI, which excludes volatile food and energy prices, rose 0.3% for the month, slightly higher than the 0.2% estimate. The 12-month core inflation rate held at 3.2%, in line with the forecast.

Fitch also noted that “The inflation challenges faced by the Fed over the past three and a half years are also likely to engender caution among FOMC members. It took far longer than anticipated to tame inflation and gaps have been revealed in central banks’ understanding of what drives inflation.”

Dovish China, hawkish Japan

In Asia, Fitch expects that rate cuts will continue in China, pointing out that the People’s Bank of China’s rate cut in July took market participants by surprise. The PBOC cut the 1-year MLF rate to 2.3% from 2.5% in July.

“[Expected] Fed rate cuts and the recent weakening of the US dollar has opened up some room for the PBOC to cut rates further,” the report said, adding that that deflationary pressures were becoming entrenched in China.

Fitch pointed out that “Producer prices, export prices and house prices are all falling and bond yields have been declining. Core CPI inflation has fallen to just 0.3% and we have lowered our CPI forecasts.”

It now expects China’s inflation rate to bet at 0.5% in 2024, down from 0.8% in its June outlook report.

The ratings agency forecast an additional 10 basis points of cuts in 2024, and another 20 basis points of cuts in 2025 for China.

On the other hand, Fitch noted that “The [Bank of Japan] is bucking the global trend of policy easing and hiked rates more aggressively than we had anticipated in July. This reflects its growing conviction that reflation is now firmly entrenched.”

With core inflation above the BOJ’s target for 23 straight months and companies prepared to grant “ongoing” and “sizable” wages, Fitch said that the situation was quite different from the “lost decade” in the 1990s when wages failed to grow amid persistent deflation.

This plays into the BOJ’s goal of a “virtuous wage-price cycle” — which boosts the BOJ’s confidence that it can continue to raise rates towards neutral settings.

Fitch expects the BOJ’s benchmark policy rate to reach 0.5% by the end of 2024 and 0.75% in 2025, adding “we expect the policy rate to reach 1% by end-2026, above consensus. A more hawkish BOJ could continue to have global ramifications.”

Finance

Visa & Mastercard execs grilled by senators on high swipe fees

Published

21 minutes ago

November 19, 2024

Business Finance News

The Senate Judiciary Committee convened on Tuesday for a hearing on the alleged Visa–Mastercard “duopoly,” which committee members from both sides of the aisle say has left retailers and other small businesses with no ability to negotiate interchange fees on credit card transactions.

“This is an odd grouping. The most conservative and the most liberal members happen to agree that we have to do something about this situation,” committee chair and Democratic Illinois Sen. Dick Durbin said.

Interchange fees, also known as swipe fees, are paid from a merchant’s bank account to the cardholder’s bank, whenever a customer uses a credit card in a retail purchase. Visa and Mastercard have a combined market cap of more than $1 trillion, and control 80% of the market.

“In 2023 alone, Visa and Mastercard charged merchants more than $100 billion in credit card fees, mostly in the form of interchange fees,” Durbin told the committee.

Durbin, along with Republican Kansas Sen. Roger Marshall, have co-sponsored the bipartisan Credit Card Competition Act, which takes aim at Visa and Mastercard’s market dominance by requiring banks with more than $100 billion in assets to offer at least one other payment network on their cards, besides Visa and Mastercard.

“This way, small businesses would finally have a real choice: they can route credit card transactions on the Visa or Mastercard network and continue to pay interchange fees that often rank as their second or biggest expense, or they could select a lower cost alternative,” Durbin told the committee.

Visa and Mastercard, however, stand by their swipe fees.

“We consider them incentives, some people might consider them penalties. But if you can adopt new technology that reduces the risk and takes fraud out of the system and improves streamlined processing, then you would qualify for lower interchange rates,” said Bill Sheedy, senior advisor to Visa CEO Ryan McInerney. “It’s very expensive to issue a product and to provide payment guarantee and online customer service, zero liability. All of those things, and many more, senator, get factored into interchange [fees].”

The executives also warned against the Credit Card Competition Act, with Sheedy claiming that it “would remove consumer control over their own payment decisions, reduce competition, impose technology sharing mandates and pick winners and losers by favoring certain competitors over others.”

“Why do we know this? Because we’ve seen it before,” Mastercard President of Americas Linda Kirkpatrick said, in reference to the Durbin amendment to the 2010 Dodd-Frank Act, which required the Fed to limit fees on retailers for transactions using debit cards. “Since debit regulation took hold, debit rewards were eliminated, fees went up, access to capital diminished, and competition was stifled.”

But the current high credit card swipe fees for retailers translate to higher prices for consumers, the National Retail Federation told the committee in a letter ahead of the hearing. The Credit Card Competition Act, the retail industry’s largest trade association wrote, will deliver “fairness and transparency to the payment system and relief to American business and consumers.”

“When we think of consumer spending, credit card swipe fees are not the first thing that comes to mind, yet those fees are a surprisingly large part of consumer spending,” Notre Dame University law professor Roger Alford said. “Last year, the average American spent $1,100 in swipe fees, more than they spent on pets, coffee or alcohol.”

Visa and Mastercard agreed to a $30 billion settlement in March meant to reduce their swipe fees by four basis points for three years, but a federal judge rejected the settlement in June, saying they could afford to pay more.

Visa is also battling a Justice Department lawsuit filed in September. The payment network is accused of maintaining an illegal monopoly over debit card payment networks, which has affected “the price of nearly everything,” according to Attorney General Merrick Garland.