By Christopher Rugaber —
The Associated Press
Ever since the Federal Reserve signaled in the fall that it probably wouldn't raise interest rates any further, Wall Street traders, economists, car buyers, aspiring homeowners—that is, pretty much everyone—began to obsess over one question. : When will the Fed start lowering rates?
But now, as the U.S. economy shows surprising vigor, a different question has arisen: Will it actually lower rates this year, as the Federal Reserve itself has predicted, or at all?
The Fed typically cuts rates only when the economy appears weak
and needs help.
Lower interest rates would reduce borrowing costs for homes, cars and other major purchases and would likely boost stock prices, all of which could help accelerate growth. An even more robust economy could also benefit President Joe Biden's re-election campaign.
The blockbuster March jobs report, released Friday, reinforced the idea that the economy is handling itself quite well. According to the Government, companies created a large number of jobs last month, more than 300,000, and the unemployment rate fell from 3.9% to 3.8%.
Some analysts responded by arguing that it's clear that the last thing the economy needs now is the stimulus of lower rates.
“If the data is solid, why cut?” asked Torsten Slok, chief economist at Apollo Global Management, a wealth management firm. “I think the Fed will not lower rates this year. Keeping them high for longer is the answer.”
[Inflation rises to 3.2% due to gasoline and income, in a sign of resistance that may complicate Biden's reelection]
In March, Fed policymakers
had forecast three rate cuts by 2024
, as in December. Some economists still expect the Fed to make its first taper in June or July. But even at last month's Fed meeting, some cracks emerged: 9 of 19 policymakers only forecast two rate cuts or less by 2024.
Since then, Friday's jobs data, combined with an unexpectedly encouraging report showing that factory output is expanding again after months of contraction, suggest the economy is undergoing an unexpectedly healthy streak of growth.
Despite the Federal Reserve's aggressive streak of rate hikes in 2022 and 2023, which sent mortgage rates and other borrowing costs soaring, the economy is defying long-standing expectations that it would weaken.
These trends have made some Federal Reserve officials nervous. Although inflation has come down sharply from peaks, it remains stubbornly above the 2% target. Rapid economic growth could reignite inflationary pressures, undoing progress.
In a series of speeches last week, several Federal Reserve officials insisted that there was no need to cut short-term interest rates. Instead, they said, they need more information about where exactly the economy is headed.
“It's too early to think about cutting interest rates,” Lorie Logan, president of the Federal Reserve Bank of Dallas, said in a speech. “I will need more resolution of the uncertainty about the economic path we are on.”
Raphael Bostic, head of the Atlanta Fed, favored just one cut this year, and not before the last three months. And Neel Kashkari, president of the Minneapolis Fed, sent stock prices tumbling Thursday afternoon after raising the possibility that the Fed might not cut at all this year.
[The Federal Reserve keeps interest rates unchanged and suggests that it will not lower them until inflation is contained]
“If we continue to see strong job growth,” Kashkari said, “if we continue to see strong consumer spending and strong GDP growth, then why would we cut rates?”
However, a strong economy and more hiring, alone, may not necessarily preclude rate reductions. Chairman Jerome Powell and other officials, such as Cleveland Fed President Loretta Mester, have stressed that the main factor in the decision to cut rates is when inflation resumes its decline toward the 2% target.
They point out that the economy managed to grow briskly in the second half of 2023 even as inflation fell steadily. By the Fed's preferred measure, inflation is 2.5%, down from a high of 7.1%.
Still, in January and February “core” prices (which exclude volatile food and energy costs) rose faster than is consistent with the Federal Reserve's goal, raising fears that inflation will not slow down. has completely controlled.
As a result, the Government's upcoming inflation reports will be scrutinized for signs of further moderation in inflation. Wednesday's report on the consumer price index is expected to show that core prices rose 0.3% from February to March, which is typically too fast for the Federal Reserve's liking.
One reason Powell suspects the economy can continue to grow even if inflation cools is that the supply of workers has skyrocketed over the past two years. This trend makes it easier for the economy to produce more and avoid shortages even when demand remains strong. It also helps keep wage and price growth in check.
The increase in immigration over the past two years, much of it unauthorized, has dramatically increased the number of workers willing to fill jobs. Their entry into the labor market has largely ended the labor shortage that plagued the economy in the wake of the pandemic and led to rising wages for retail, restaurant and hospitality workers.
[The 10 US cities where it will be easier to find a job in 2024]
“There are a lot more people working,” Powell said in a debate at Stanford University this week. “It's a bigger economy, rather than a tighter one.”
Whether that trend of increasing labor supply can continue this year will help determine the Fed's next steps.
But at a San Francisco Fed conference last month, even Powell acknowledged that the economy's good health reduces the urgency of cutting rates: “This economy doesn't look like it's suffering from the current level of rates.” ”.
In fact, Slok and some Fed officials believe that borrowing costs are not holding back the economy as much as they would have in the past. That's because in today's economy, several trends could keep growth, inflation, and interest rates higher than in the past two decades. These include a more productive economy, larger public budget deficits and the return of some manufacturing to the United States, where it is more expensive.
“It's very difficult to make the case that the Federal Reserve should cut rates, and the debate over a further hike should arguably be livelier than it currently is,” says Thomas Simons, an economist at brokerage Jeffries.