The U.S. economy has gone into a downturn. The job market has slowed down. And prices are going down again. What else does the Federal Reserve need to do?
Another sign that it’s time for interest rates to go down.
The economy definitely needs a boost. Due to high interest rates, home sales have dropped sharply. High financing costs are making it hard to sell cars. Companies don’t want to invest. And so on.
But the Fed has been lied to many times. First, by the biggest rise in inflation in 40 years, which happened in 2021 and 2022 after the pandemic. Then, by prices that kept going up.
Look at this year’s events. After inflation slowed down a lot near the end of 2023, it went up from January to April, which stopped the Fed from cutting interest rates.
The Fed is getting ready to cut rates again soon, though, since the rise in prices seems to have stopped. Just don’t think that there will be a surprise cut when the top officials get together again at the end of July.
This week, Gov. Chris Waller, who has a big deciding vote on the Fed policy committee, said that the early-year inflation “may have been strange.” But he also said, “I need to see a little more proof that this will last.”
In an interview with The Wall Street Journal (a sister publication of MarketWatch), N.Y. Fed President John Williams, who is friendly with Fed Chair Jerome Powell, agreed with that point of view.
“Now we have a few good months. “There were some months when inflation wasn’t good,” he said this week. “That’s why I really need to see more evidence in the data that we’re really moving towards 2% before I can be sure of that.”
With the help of high interest rates, the central bank’s main goal is to bring the annual rate of inflation down to levels that were normal before the pandemic.
From a high point of 7.1% in mid-2022, the Fed’s preferred personal consumption expenditure price index has slowed down in fits and starts. However, at 2.6% over the past 12 months, it is still well below the goal.
Powell has made it clear that the Fed won’t wait until it hits 2%. Instead, it wants to see a clear trend of rates going down.
Based on what Wall Street thinks will happen, the June PCE report, which is due next week, could show that the rate of inflation fell another tick to 2.5%.
Some Fed officials are sure that there is enough evidence to cut interest rates already because inflation has slowed down and the economy and job market have gotten worse.
As president of the San Francisco Fed, Mary Daly is one of them. It was last week that she told reporters that all the new economic data supported the idea that “some policy adjustments will be warranted.” This is Fedspeak for lowering interest rates.
Some people, like Austan Goolsbee, President of the Chicago Fed, have worried that the economy could get worse if the Fed waits too long.
“The real economy is weakening after being strong,” he said last week.
A number of economists on Wall Street agree. Greg Daco, chief economist at EY Parthenon, said, “Inflation is no longer the only risk we face.”
Still, the minutes from the Fed meeting in June showed that the top leaders had different ideas about when to lower interest rates.
The split almost certainly means that the Fed won’t move until September at the earliest. Before making big changes to monetary policy, Powell has tried to get everyone at the bank to agree, and very few people have broken ranks.
Traders on Wall Street agree. Just 5% think the Fed will lower rates at their meeting on July 30 and 31. However, 98% think the first rate cut will happen in September.
That is, if inflation and the job market keep going down.
Will Compernolle, a macro strategist at FHN Financial, said, “The Fed feels comfortable waiting until September to ease […] and should prime markets for such a scenario in its communication on July 31.”
