Interest rates down, aluminum costs up: Breaking down the Fed's move

While the latest rate cut is aimed at boosting economy and employment, it fuels the risk of inflation from the current 2.9 per cent as of the end of August. But the fact is the government is now prioritising jobs over price stability.

"The labour market is really cooling off," said Fed Chair Jerome Powell at a news conference on Wednesday after the announcement of rate cut.

Diverging policy views

The conundrum in policy view is also reflected through two different viewpoints observed at the official level within the US Governmet. On one hand, Stephen Miran, newly appointed by Donald Trump to the Federal Reserve's interest-rate-setting board, has made it clear that rising consumer prices following a rate cut are a lesser concern compared to slower job growth. He also argued that tariffs will ultimately boost national savings, helping to offset the impact of higher prices. On the other hand, Jerome Powell has expressed concern, highlighting slower GDP growth and fragile consumer spending.

Miran wanted a half-point cut instead of a quarter-point. He told the Economics Club of New York that rates should be below 3 per cent by the end of 2025, completely dismissing the fear that it may fuel inflation. Although this is a slightly different view from Jerome Powell, but a very similar one to the US President Donald Trump, who thinks the rates should be as low as 1 per cent. President Trump also accused Powell on social media for leaving interest rates high all these months and let the economy get brunt.

At a press conference following the Fed's rate cut decision, Jerome Powell acknowledged that inflation remains somewhat elevated. He noted that economic activity has moderated, leading to weaker consumer spending. GDP grew at about 1.5 per cent in the first half of the year, down from 2.5 per cent last year. Powell also expressed concern over the unemployment rate, which has risen to 4.3 per cent, with payroll growth slowing to just 29,000 jobs per month over the past three months. Even so, he stressed that inflation risks cannot be overlooked.

Inflation and market opinion

Inflationary pressure is likely to stay through 2028. The Federal Reserve expects inflation to be higher than previously expected by end of next year, but not likely to grow to the peak seen in 2022 at 9 per cent. But at the same time, it is also most unlikely to return to the Fed's 2 per cent target until 2028.

Analysts argue that Donald Trump's new immigration policy could help mitigate unemployment pressures, the challenge of controlling inflation remains more complex. Tariff-induced increases in goods prices are likely to sustain upward pressure on the cost of living, complicating efforts to stabilise the economy. Policymakers will need to balance measures aimed at supporting employment with strategies to manage persistent inflationary risks.

Powell already pointed out in his conference that US industrial production saw a rebound but no growth seen in consumers' buying sentiment. In the US, industrial production in August grew by 0.1 per cent, while manufacturing rose 0.2 per cent, but spending capacity remained limited. Deloitte reported reported that aggregate wage growth lagged behind aggregate spending from mid-2024 into 2025, and this trend is likely continue in the near term. According to an estimation showed by Morgan Stanley, Growth in US consumer spending is likely to weaken to 3.7 per cent in 2025 from 5.7 per cent in 2024.

What does rate cut mean for aluminum?

Interest rate cuts typically weaken the US dollar and strengthen commodity prices. Last week, amid the hope of rate cut, the LME aluminum prices shot up by USD 43 per tonne or 1.6 per cent overnight, reaching as high as USD 2,736.5 per tonne – the highest in last six months. In the subsequent days, the price dropped to USD 2,667 per tonne but still remained month-on-month high compared to USD 2,589 per tonne, marking a growth of 3 per cent over the period.

The fear is the further aluminum price growth may potentially leads to again high input costs for the manufacturing sector. In January, when the LME aluminum benchmark price was above USD 2,500 per tonne, the world composite PMI was 51.8, down from 52.6 in December 2024. In February, it further contracted to 51.5 in tandem with the increase in LME price to nearly USD 2,700 per tonne. Until May, the world PMI index reached below the 50 threshold. It only started increasing from June, standing at 51.3, and further revived to 52.4 in July, when the price most stood below USD 2,600 per tonne.

The decrease in PMI also indicates lower demand for critical metals like aluminum. The U.S. tariffs have already suppressed US aluminum demand conditions and shifted trade flows. According to the Aluminum Association, North American aluminum demand fell 4.4% during the first half of 2025. Outside of foil, demand reportedly fell in all market segments.

The LME aluminum premium duty paid US Midwest is another factor that influences aluminum price movement. The interest rate cut also led to an increase in the premium price, standing at USD 1,640.54 per tonne– six months high from the price of USD 850 per tonne.

Now, one could argue that manufacturers can now access cheaper financing due to lower interest rates, but the benefit will be offset as rising aluminum prices drive up overall raw material costs.

On the other hand, quite an opposite may happen. The price may remain range-bound like it was in 2019 when Federal Reserve cut interest rates as part of a mid-cycle adjustment to stave off economic slowdown. Since the price has already attained a growth caused by supply-chain disruptions due to tariffs, it may now remain static.

Analysts suggest that in this scenario, we might witness a repetition of the 2019 trend. The subdued market reaction stemmed from the fact that the rate cuts were aimed at maintaining economic momentum rather than responding to a crisis, which limited both the downside and upside potential for these metals. The prices are likely to remain confined until there is a significant uptick in demand.

"We think metal prices would likely follow the path seen in the dot-com bubble in 2000-2003," analysts at HSBC said.

And in case the US economy slides into a further recession, the Federal Reserve will respond with more aggressive rate cuts as they already plan for two more cuts this year to bring the interest rate down below 3 per cent.

Conclusion

The recent Fed rate cut underscores the delicate balancing act between supporting economic growth and containing inflation. While lower interest rates could provide manufacturers with cheaper financing, rising aluminum prices may offset these benefits, keeping input costs high. Historical trends, such as the 2019 mid-cycle rate cuts, suggest that aluminum prices could remain range-bound unless there is a significant surge in demand.