US cuts interest rates to lowest bank rate in three years - Chris Harmse

The US Federal Reserve’s Federal Open Market Committee (FOMC) has cut interest rates for the second time this year. The FOMC officials agreed to another 25 basis points (0.25%) cut, that lowers its benchmark lending rate to a range between 3.75% and 4%. This is the lowest Bank rate in three years. This cut brings more uncertainty to markets as was expected with the US dollar appreciation against most other currencies and precious metals like gold and platinum lost steam. Adding to the rate move, the FOMC announced that it would be ending the reduction of its asset purchases – a process known as quantitative tightening - on  December 1, 2025.

The statement revealed some serious concerns about the US economy over the short run. The first one is the worries over the job market. The FOMC expressed its fear that the “downside risks to employment rose in recent months”. Given the US government shut down that continues, the lack of official non-farm payrolls data also seems not to be released this coming Friday. This will be the second consecutive month of uncertainty on the employment data and will increase tensions on the state of the US economy.

Secondly, US Federal Reserve chair Jerome Powell, rattled markets when he indicated that there is doubt on whether another reduction is coming in December. Kansas City Fed President Jeffrey Schmid argues that the FOMC should keep rates at the same level for several months comes against the different viewpoint of Stephen Miran the appointee of President Donald Trump, who has pushed hard on the committee to lower rates quickly. Mirian feels that the rate should have been cut by half a point.

Uncertainty over the US economy deepened last week when apart from the consumer price index release, indicating that inflation is on the rise,  the government has suspended all data collection and reports, meaning such key measures as nonfarm payrolls, retail sales and a plethora of other macro data is unavailable. The Dow Jones industrial index nevertheless continues its bullish run, gaining 0.75% last week, up by 2.5% for the month of October as investors returned to US equities and sold haven assets like gold and platinum. 

South Africa’s equity markets and precious metal prices recorded big gains.

Although equity prices and precious metals like gold and platinum experienced some sell off last week, risky assets on South African financial markets recorded big advances during the month of October. On the JSE, the All Share index (ALSI) traded 1.1% lower last week, after the prices for commodities contracted strongly, pushing the Resources 10 board down by 1.8% ending 6.4% own during October. Despite this, the ALSI ended on a new month record level, gaining 0.6% over September and trades 30% up for the year to date.

The same trend was experienced by precious metals. The gold price lost 4.2% over the past seven working days but still ended October ($4 006) higher by $139 per ounce (3.4%), with most analysts forecasts that bullion will remain bullish. Platinum remained flat over last week and during October, trading around $1600 per ounce whereas palladium lost 1.4% last week but still trades more than 14.0% up for the month at $1 445. 

The Rand moved uncertain and volatile against the major currencies last week. As was expected that the scrapping of South Africa from the grey list by the Financial Action Task Force would strengthen the Rand, the currency traded against the green bag at one stage last week at R17.09 to the dollar, the strongest in 2025 to date. The lowering of the US bank rate by the FOMC on Wednesday saw the Rand depreciating against the US dollar by 5 cents over the week to R17.31/$, ending flat against the Euro at R20.07/ €, but gaining 20 cents against the Pound to R22.77/£. 

Prospects for this coming week

This coming week all eyes will be on the repo rate decision by the Monetary Policy Committee (MPC) of the Reserve Bank that will be announced at a press conference on Thursday. Sentiment is turning more towards a 25 basis points cut by the MPC. The stronger Rand, lower oil prices, and signs that food prices and other import prices increases on an annual basis are likely to subside over the next six months, will contribute to the annual inflation rate to dip under the MPC’s "unofficial” target rate of 3.0%. These expectations may turn the sentiment by the MPC from a no-cut to 25 points decrease on Thursday.

On global markets investors await the release of the US non-farm payrolls for both September and October this coming Friday. Due to the ongoing US government shutdown, it may not be released. Expectations are that the economy created only 50 000 new jobs last month, putting the unemployment rate at 4.3%, the same as in August before the shutdown. If the data is not released, US share markets and the US dollar will come under pressure. 

Chris Harmse is the consulting economist of Sequoia Capital Management and a senior lecturer at Stadio Higher Education. 

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