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Fed Reserve Set to Cut Rates Again 11/04 06:17
No one knows how Tuesday's presidential election will turn out, but the
Federal Reserve's move two days later is much easier to predict: With inflation
continuing to cool, the Fed is set to cut interest rates for a second time this
year.
WASHINGTON (AP) -- No one knows how Tuesday's presidential election will
turn out, but the Federal Reserve's move two days later is much easier to
predict: With inflation continuing to cool, the Fed is set to cut interest
rates for a second time this year.
The presidential contest might still be unresolved when the Fed ends its
two-day meeting Thursday afternoon, yet that uncertainty would have no effect
on its decision to further reduce its benchmark rate. The Fed's future actions,
though, will become more unsettled once a new president and Congress take
office in January, particularly if Donald Trump were to win the White House
again.
Trump's proposals to impose high tariffs on all imports and launch mass
deportations of unauthorized immigrants and his threat to intrude on the Fed's
normally independent rate decisions could send inflation surging, economists
have said. Higher inflation would, in turn, compel the Fed to slow or stop its
rate cuts.
On Thursday, the Fed's policymakers, led by Chair Jerome Powell, are on
track to cut their benchmark rate by a quarter-point, to about 4.6%, after
having implemented a half-point reduction in September. Economists expect
another quarter-point rate cut in December and possibly additional such moves
next year. Over time, rate cuts tend to lower the costs of borrowing for
consumers and businesses.
The Fed is reducing its rate for a different reason than it usually does: It
often cuts rates to boost a sluggish economy and a weak job market by
encouraging more borrowing and spending. But the economy is growing briskly,
and the unemployment rate is a low 4.1%, the government reported Friday, even
with hurricanes and a strike at Boeing having sharply depressed net job growth
last month.
Instead, the central bank is lowering rates as part of what Powell has
called "a recalibration" to a lower-inflation environment. When inflation
spiked to a four-decade high of 9.1% in June 2022, the Fed proceeded to raise
rates 11 times -- ultimately sending its key rate to about 5.3%, also the
highest in four decades.
But in September, year-over-year inflation dropped to 2.4%, barely above the
Fed's 2% target and equal to its level in 2018. With inflation having fallen so
far, Powell and other Fed officials have said they think high borrowing rates
are no longer necessary. High borrowing rates typically restrict growth,
particularly in interest-rate-sensitive sectors such as housing and auto sales.
"The restriction was in place because inflation was elevated," said Claudia
Sahm, chief economist at New Century Advisors and a former Fed economist.
"Inflation is no longer elevated. The reason for the restriction is gone."
Fed officials have suggested that their rate cuts would be gradual. But
nearly all of them have expressed support for some further reductions.
"For me, the central question is how much and how fast to reduce the target
for the (Fed's key) rate, which I believe is currently set at a restrictive
level," Christopher Waller, an influential member of the Fed's Board of
Directors, said in a speech last month.
Jonathan Pingle, an economist at Swiss bank UBS, said that Waller's phrasing
reflected "unusual confidence and conviction that rates were headed lower."
Next year, the Fed will likely start to wrestle with the question of just
how low their benchmark rate should go. Eventually, they may want to set it at
a level that neither restricts nor stimulates growth -- "neutral" in Fed
parlance.
Powell and other Fed officials acknowledge that they don't know exactly
where the neutral rate is. In September, the Fed's rate-setting committee
estimated that it was 2.9%. Most economists think it's closer to 3% to 3.5%.
The Fed chair said the officials have to assess where neutral is by how the
economy responds to rate cuts. For now, most officials are confident that at
4.9%, the Fed's current rate is far above neutral.
Some economists argue, though, that with the economy looking healthy even
with high borrowing rates, the Fed doesn't need to ease credit much, if at all.
The idea is that they may already be close to the level of interest rates that
neither slows nor stimulates the economy.
"If the unemployment rate stays in the low 4's and the economy is still
going to grow at 3%, does it matter that the (Fed's) rate is 4.75% to 5%?" said
Joe LaVorgna, chief economist at SMBC Nikko Securities, asked. "Why are they
cutting now?"
With the Fed's latest meeting coming right after Election Day, Powell will
likely field questions at his news conference Thursday about the outcome of the
presidential race and how it might affect the economy and inflation. He can be
expected to reiterate that the Fed's decisions aren't affected by politics at
all.
During Trump's presidency, he imposed tariffs on washing machines, solar
panels, steel and a range of goods from China, which President Joe Biden
maintained. Though studies show that washing machine prices rose as a result,
overall inflation did not rise much.
But Trump is now proposing significantly broader tariffs -- essentially,
import taxes -- that would raise the prices of about 10 times as many goods
from overseas.
Many mainstream economists are alarmed by Trump's latest proposed tariffs,
which they say would almost certainly reignite inflation. A report by the
Peterson Institute for International Economics concluded that Trump's main
tariff proposals would make inflation 2 percentage points higher next year than
it otherwise would have been.
The Fed could be more likely to raise rates in response to tariffs this
time, according to economists at Pantheon Macroeconomics, "given that Trump is
threatening much bigger increases in tariffs."
"Accordingly," they wrote, "we will scale back the reduction in the funds
rate in our 2025 forecasts if Trump wins."
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