The Wall Street Journal suggests the Fed will make a U-turn on interest rates soon:
Twenty months after the Federal Reserve began a historic campaign against inflation, investors now believe there is a much greater chance that the central bank will cut rates in just four months than raise them again in the foreseeable future. Interest-rate futures indicated Monday a 52% chance the Fed will lower rates by at least a quarter-of-a-percentage point by its May 2024 policy meeting.
That would be good news. It would be even better news if the Fed did it sooner. The interest rate hikes of last year are likely to start having an impact soon and the signs of a recession are mounting. Youth unemployment has spiked, personal savings are dropping, investment has stagnated, and the yield curve is staying stubbornly and deeply inverted:
At the same time, inflation looks to be well under control:
I've never been a big believer in "forward guidance," but I do believe a bit in ordinary old animal spirits. High interest rates are going to do what they do no matter what the Fed does now, but a reduction in interest rates could have at least a small impact on optimism that affects spending and investment. The sooner it happens the better.
Broken Record Club chiming in because you continue to be absolutely incorrect about the timing of the impact of interest rate changes.
"The interest rate hikes of last year are likely to start having an impact soon"
Most of their impact is already in the economy, and they are continuing to have ongoing impact by chilling home prices, raising rents (housing is a replacement good!), and other deleterious effects.
As for inflation, this bout by and large was (is) never structural in a way that interest rates would have impacted anyway.
PS - you can't have it both ways. At the end of your post you even acknowledge that there's an immediate impact from rate changes, but seemingly this is only for rate decreases as you continue to insist that rate increases take a long time (how long, we ask? You are never specific). It reeks of pure motivated reasoning and it's obvious to anyone with any knowledge on the subject.
Came here to make this point, but you beat me to it. I was absolutely flabbergasted when Kevin said that lowering rates would help. It’s like when Jon Stewart set up a debate between George W. Bush and George W. Bush, except this debate between Kevin and Kevin is within a single blog post.
Read it more carefully, the effects of the high interest rates will still be working their way through the economy, it's just that lowering rates now will affect things at the margin. Lowering them sooner would have been better and not raising rates quite so high the best.
I read it plenty carefully enough. Kevin's wrong, and your point is identical to his. And wrong.
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That’s very clearly not what he’s saying, though. The quoted passage is not at all vague: “The interest rate hikes of last year are likely to start having an impact soon.”
It is extremely reasonable to argue that the full effect of the entirety of the Fed’s rate hikes has not yet been felt. The most recent hike was just a few months ago. But this is very explicitly *not* what Kevin is saying here. He’s saying *last year’s* hikes have not yet had an impact.
What you described is what Kevin’s position used to be, when he was confidently proclaiming a recession would arrive early in 2023. But when the economy remained resilient long after his prognostication indicated otherwise, he gradually changed his invocation of “long and variable lags” from “the impact of interest rate hikes take 12-18 months to fully impact the economy” (a reasonable view, though in my opinion outdated) to “it takes 18+ months for monetary policy to have any impact.”
What Kevin is saying is a bit puzzling.
He makes a statement as you quoted, but then he follows that by describing the impacts that higher rates have already had on the economy.
A bit contradictory.
I dont read this post or his many others as a literal statement that higher interest rates have had no impact whatsoever on the economy. Its impossible to conclude that if you read the posts.
Its odd that you respond to a call to read the entire post more clearly with an 'analysis' of one single sentance in isolation.
Its certainly possible to be confused as to what exactly Kevin is trying to say. But it does help to read the entire post before trying to win the comments.
"..a reduction in interest rates could have at least a small impact on optimism that affects spending and investment."
home prices continued to rise in large part because of low inventory. a .25 cut by next May isn't much to get excited about
One of these days, lack of housing affordability is to going to be politically damaging. But for now, I'd say most of the evidence suggests rising home prices tend to benefit the incumbency brand. In other words, Democrats probably have more to gain than lose if housing prices stay firm (or even rise a bit) over the next year.
I would bet a nice dinner against the rate going down this time.
If I had to guess when, I'd say second quarter next year. That will maximize political damage while leaving Dear Jerome a not very convincing excuse. But all he needs is a figleaf to wave off journalists with anyway.
Why would a May decrease maximize political impact?
If there's a recession during a Presidential Election year, the incumbent usually loses. The Fed is in the unpleasant situation of making the wrong move and handing the election to Trump.
Maximizing political damage to Biden and Ds by keeping rates higher for longer and thereby increasing the odds of a summer-fall recession, would be my reading of the comment. That would be as opposed to starting (small and incremental) rate drops earlier in the year.
I'm not convinced they're in any hurry to start cutting, no matter what Wall Street has been anticipating since what, September? That's been wish-casting, imho. This is the same good gray Fed that flooded us with liquidity for all of 2020 and 2021, contrary to any kind of gop orthodoxy, and in order to recover its killjoy credentials will have to see actual recession onset.
Their game is they need to convince everybody they're 100% serious about killing inflation stone cold dead and stomping its heart flat and sowing salt on the corpse. A recession is the only thing that'll signal that kind of seriousness. Sure hope I'm wrong about that, but it's where the signs seem to point.
I believe Dean Baker pointed to the likelihood, if not the necessity, of a rate cut fairly soon. If it happens, I would imagine the Feds will react sooner than later in the first quarter if the fourth quarter GDP declined, and no sooner than the second quarter if it remained strong.
I assume the FED objective is to have a recession in time to influence the election. You might look a FED history to see if this is a pattern.
The current Fed Board of Governors is 4:3 Democrat: https://en.wikipedia.org/wiki/Federal_Reserve_Board_of_Governors#Current_members Do you assert they are political traitors?
I would say that at almost all times, many of the Democrats on the FOMC (not just the board of governors) are nowhere near the left or liberal side of the political spectrum when it comes to economic matters.
The median view on the FOMC is definitely right of center and keeping the labor market in check is their primary concern.
Why does the Fed's use of interest rates to control inflation remind me of "doctors" who bled their patients to rid them of evil humors?
The Fed is always a bit cryptic, especially when you take in commentary by different Fed leaders saying slightly different things.
At all times they are primarily concerned with keeping the labor market in check. That is their primary objective.
Don't count on it.
The Fed doesn't reduce interest rates because they have some preconceived notion of what interest rates should be, and they want to get to that level. (Note: while young people today might think that "what interest rates should be" is around 3%, it was not very long ago that "what interest rates should be" was more like 6% or even 8%.) The Fed reduces interest rates in order to stimulate the economy, and the economy is basically roaring already by most measures.
So short of a recession showing signs of arriving, I would categorically discount the possibility of a rate cut.
Another way to look at it is through constructing interest rates by parts. The first part is the inflation rate, which the Fed has openly said it wants to be at about 2%. The second piece is the reward demanded for giving up immediate consumption; this might be in the 0.5-2.0% range. The third piece is the risk of losing out because inflation spikes while you were dutifully saving rather than spending. Maybe another 0.5-2.0%.
So a 3% interest rate, absent a need to stimulate the economy, is probably just about an absolute lower bound if 2% is your inflation target.
And a mean or median expectation is probably no more than slightly below the current 5.25-5.50% federal funds rate.
Mortgage rates are already dropping. People seem to forget that monetary policy only indirectly affects the price people pay to borrow money. I think we'll see Fed easing no earlier than March or so. Which will be fine. Most signs point to a soft landing at this point.
I don’t understand the thinking of many commenters that the Fed wants a recession…the instability of a Trump/MAGA presidency is the last thing the Fed would want. And, maybe the Fed has been right all along….raised rates and inflation has greatly slowed, while unemployment has stayed low and GDP growth is still robust (so far). We can argue whether inflation would have cooled anyway, but there’s no good way to know. What we do know is that the economy is in a pretty good spot right now because/despite of the Fed moves and that’s what counts.
Agreed. It's hardly the case that the Democratic Party has been horrible for the interests of Capital when it holds power. And many of the things the GOP advocates now that the monster it created is running the show—trade wars, debt defaults, crackpot science policy, insurrections, anti-tech policies, etc—are hardly high on the Plutocratic Wish List (look who just got the Koch endorsement). The notion that Jerome Powell is chomping at the bit to throw the election to MAGA is fanciful.
I don't know about anybody else, but I don't think it's about throwing the election where Powell is concerned, and don't think I've indicated that. All things being equal he'd probably prefer an R president-- his background is pretty establishment R-- but the way things are shaping up I think he'd probably be happier with Biden than trump.
It's just that the circles he runs in are more focused on interest rates, inflation measures, labor costs, and investment- and business-climate stuff like that than they are on anything overtly political or overtly having to do with people's general welfare. He showed them he was willing to throw out the old textbook when liquidity was the crisis, and now he needs to demonstrate he's up to the more traditional job of getting the raging beast inflation under control.
Investors like a little bit of steady inflation to encourage money to flow but are petrified about moderate or high levels, especially if unstable or if they translate too much into wage raises. And they're always trying to anticipate what that'll be like down the road, more than what's happening now.
So I think he's out to convince his main audience that he's serious about inflation now and going forward. The election coming up next year is kind of epiphenomenal from that point of view.
OTOH, if he values rule of law and democracy that could affect how he does things, and he is a born DC insider and ex investment banker so he might actually value them. If so, he wouldn't be quite so absolutist about killing inflationary traces, and that would be good. But as far as I can see central bankers have tended to care more about the indicators than about the systemic framework.
I tend to agree. Nobody sane wants Trump 2.0 and the instability it will bring. The only people clamoring for a Trump return are burn it all downers and make the libs cry harders.