In a significant development for the upcoming US presidential election, speculations are mounting that the US Federal Reserve will begin cutting interest rates as early as September, possibly bolstering Kamala Harris's chances of victory. This news has come just as Democrats gather for their national convention in Chicago, where party members eagerly anticipate the potential economic boost.

Economists on Wall Street have indicated that the world's most powerful central bank is poised to embark on a cycle of interest rate cuts before the end of the year. After a turbulent month in financial markets, with concerns of a possible US recession, a majority of economists polled by Reuters remain optimistic, stating that they do not expect a downturn to materialize. Instead, they predict that the Fed will implement 0.25 percentage point cuts at each of its remaining meetings in 2024.

The heads of three regional Federal Reserve banks have also signaled their readiness to initiate a rate-cutting cycle, aiming to alleviate the burden on households and businesses caused by high borrowing costs. Neel Kashkari, President of the Minneapolis Federal Reserve, emphasized the need to consider potential interest rate reductions as early as September due to a weakening jobs market. In an interview with the Wall Street Journal, Kashkari stated, "The balance of risks has shifted, so the debate about potentially cutting rates in September is an appropriate one to have." His sentiments were echoed by Alberto Musalem, Head of the St Louis Fed, and Raphael Bostic, President of the Atlanta Fed.

As investors bet on the increasing chances of a Fed rate cut as soon as next month, yields on US government debt observed a decline on Monday. This development precedes what is expected to be a highly contested presidential election between Kamala Harris and Donald Trump on November 5th. With the markets eager for insights from US Fed Chair Jerome Powell, who is scheduled to speak at the central bank's annual Jackson Hole meetings on Friday, anticipation builds for a clearer understanding of the future path of interest rates. The yield on benchmark 10-year US Treasury bonds fell by 0.2 basis points to 3.89% amid these expectations.

Based on trading activities in financial markets, there is a 76% likelihood of a 0.25 percentage point cut in interest rates in September. Krishna Guha, Vice-Chair of Evercore ISI, predicts that Powell's speech at Jackson Hole will shed light on the Federal Reserve's confidence in inflation returning to 2% and the initiation of rate reductions starting in September. Guha adds, "We expect [Powell] will use his Jackson Hole speech to explain why the Fed is now sufficiently confident inflation is heading back durably to 2% to begin dialling back rates soon - [from] September - and [to] provide a basic framework for the cutting cycle ahead."

The US annual inflation rate dipped below 3% in July for the first time since 2021, offering relief to investors after a recent sharp slowdown in the US job market, which caused concerns over a potential recession. Despite initially hoping for a smooth transition from elevated borrowing costs, implemented to combat the surge in US inflation following the easing of COVID-19 restrictions and the global energy crisis stemming from Russia's invasion of Ukraine, global financial markets experienced a rout earlier this month. However, optimism has been revived as indications suggest that the Federal Reserve is gearing up for its first interest rate cut since March 2020 when the pandemic ravaged economies worldwide.

Mohit Kumar, Chief Economist at Jefferies, anticipates that Powell will provide reassurance to the markets, indicating that the Fed is moving towards a rate cut and that there is no need for panic. Kumar suggests that Powell may acknowledge the employment slowdown but emphasize the overall resilience of the broader economy.

As Kamala Harris vies for the presidency, the prospect of a series of interest rate cuts by the US Federal Reserve could potentially boost her campaign and support a more stable economic environment leading up to the election. It remains to be seen how these developments will shape the race and the future of the US economy.