Raphael Bostic, the President of the Atlanta Fed and a voting member of the FOMC, stated in his latest speech, "The Fed should patiently and gradually lower its policy rates, not rush to adjust rates to a neutral level. We must restore the inflation rate to the target level of 2%. In addition, Mary Daly, the President of the San Francisco Fed, also expressed an open attitude towards not lowering interest rates in one of the remaining two FOMC policy meetings this year.

This has raised expectations in the market for the Fed to pause rate cuts at one of the meetings, although financial markets still expect the Fed to cut rates twice before the end of this year, each time by 25 basis points, and further cuts next year.

At the same time, attention has been focused on the latest U.S. fiscal deficit. On October 18th local time, the U.S. Treasury Department released the budget deficit situation for the 2024 fiscal year, with a deficit of $1.833 trillion, an 8% increase from the 2023 fiscal year, and federal debt interest exceeding $1 trillion for the first time. This is mainly due to the Fed's previous aggressive rate hikes and long-term maintenance of high rates leading to a heavier burden on government debt interest costs, increased costs for social security programs, and military spending.

Latest Statement from the Fed

On October 18, 2024, Raphael Bostic, the President of the Atlanta Fed and a voting member of the FOMC, stated that the Fed should patiently and gradually lower its policy rates. This way, it can bring the inflation rate down to the 2% target level and also prevent the U.S. economy from falling into recession.

On the same day, Bostic stated at the American Enterprise Institute's Economic Education Forum in Mississippi, "We are not in a rush to adjust rates to a neutral level, we must restore the inflation rate to the 2% target level, and will remain patient."

The neutral interest rate refers to the level of interest rates that neither stimulates nor suppresses economic growth. Bostic believes that the neutral policy interest rate should be in the range of 3% to 3.5%.

Bostonic pointed out that he expects the Fed to further lower the benchmark interest rate. "If the economy continues to develop according to the current trend, if inflation continues to decline, the labor market remains strong, and we still see positive production, then we will be able to continue on the path back to the neutral interest rate."

Bostic expects that by the end of 2025, the inflation rate in the United States may decrease to the target of 2% set by the Federal Reserve, by that time interest rates should also be able to adjust to the neutral level.

Currently, the financial markets expect the Fed to cut interest rates twice before the end of this year, each time by 25 basis points, and further cuts next year. By September 2025, the federal funds rate may fall into the range of 3.25% to 3.5%.

However, there appear to be significant variables in the prospect of Fed rate cuts. After a significant 50 basis point cut by the Fed in September, US employment data has been much stronger than expected, with the unemployment rate also dropping to 4.1%.

This has led to market expectations of the Fed pausing rate cuts at a certain meeting. Bostonic revealed in a previous interview that he holds an open attitude towards "no rate cut in the November meeting, or only a 25 basis point cut", depending on the development of economic prospects.

In addition to Bostic, Daly, the President of the San Francisco Federal Reserve, also maintains an open attitude towards not cutting interest rates in one of the remaining two Fed policy meetings this year. Daly stated in a speech at New York University this week that if the US economy continues to maintain recent trends, 'one to two rate cuts are reasonable'.

Daley emphasized that the central bank's 50 basis point rate cut last month does not predict the magnitude or pace of future rate cuts. Despite better-than-expected economic reports in the past month, she expressed uncertainty about the resurgence of the inflation rate.

The US fiscal deficit has exceeded 1.8 trillion US dollars.

At the moment when the Federal Reserve has just started the interest rate cut cycle, the United States government debt crisis has already sounded the alarm.

On October 18, Eastern Time, the U.S. Treasury Department announced that for the 2024 fiscal year ending September 30, the fiscal budget deficit of the U.S. federal government reached $1.833 trillion, the third highest on record, only behind the $3.132 trillion in the 2020 fiscal year during the COVID-19 pandemic and $2.772 trillion in the 2021 fiscal year.

The fiscal budget deficit of the U.S. federal government for the 2024 fiscal year has expanded by nearly $1.7 trillion compared to the 2023 fiscal year, an increase of over 8.1%, and the deficit-to-GDP ratio has exceeded 6% for the second consecutive year, standing at 6.4%, slightly higher than the 6.2% in the 2023 fiscal year.

This is mainly due to the Federal Reserve raising interest rates and maintaining high rates, which has made the government debt interest costs heavier, along with increased costs for social security programs and military spending.

Among them, the increasing debt interest is one of the main drivers of the expanding deficit. In the 2024 fiscal year, the interest expense on U.S. government debt reached $1.1 trillion, the first time annual interest expenses exceeded $1 trillion, a year-on-year increase of $254 billion compared to the 2023 fiscal year, a growth of 29%. As calculated, interest expenses account for approximately 3.93% of GDP, reaching a new high since 1998.

Analysts believe that as the Federal Reserve significantly cut interest rates by 50 basis points in September to start an easing cycle, the future pressure on the U.S. government's interest expenses is expected to ease.

As of the end of September, the weighted average interest rate on outstanding U.S. federal debt was 3.32%, the highest level in 15 years. Reuters quoted a statement from a senior U.S. Treasury official stating that this weighted average interest rate for the debt started to decline in September, marking the first decline since January 2022.

Looking ahead at the future fiscal deficit situation of the United States, some analysts suggest that whether it is 'Harris Economics' or 'Trump Economics,' they both have a common feature: deficits. The economic policies proposed by Democratic presidential candidate Harris and Republican presidential candidate Trump may both lead to inflation and an expansion of the fiscal deficit in the United States.

The Committee for a Responsible Federal Budget estimates that Harris's economic plan will lead to a $3.5 trillion increase in government debt over ten years, while Trump's economic plan will cause debt to soar by $7.5 trillion.

Editor/Somer