Who let the dogs out?
The trend of interest rate cuts continued during the month of August. Australia, New Zealand, Indonesia, Mexico and the United Kingdom were among the large economies whose central banks lowered policy rates. They are likely to be joined next month by the US Federal Reserve, the most important central bank of the lot. It faces a particularly difficult environment. Import tariff increases will put upward pressure on goods prices, though it is uncertain by how much, while at the same time potentially weighing on business activity and household real incomes. In other words, it risks pulling the Fed’s employment and inflation dual mandate in opposite directions. For central banks outside the US, it is a more straightforward story to which they can respond with rate cuts: tariffs will probably reduce exports to the US but not lead to inflation.