Achi news desk-
WASHINGTON (AP) – Ever since the Federal Reserve signaled last fall that it was likely to raise interest rates, Wall Street traders, economists, car buyers, prospective homeowners – almost everyone – began obsessing over one question: when the Fed start cutting rates?
But now, with the US economy showing surprising energy, a different question has arisen: Will the central bank really cut rates three times this year, as the Fed itself has predicted—or even cut at all? The Fed usually cuts only when the economy appears to be weakening and in need of help.
Lower interest rates would reduce borrowing costs for homes, cars and other major purchases and would likely fuel higher stock prices, all of which could help accelerate growth. An even more robust economy could also benefit President Joe Biden’s re-election campaign.
Friday’s big jobs report for March reinforced the idea that the economy is doing quite nicely on its own. The government said employers added a huge burst of jobs last month – more than 300,000 – and the unemployment rate fell to a low of 3.8% from 3.9%.
Some analysts responded by arguing that clearly the last thing the economy needs now is more stimulus from lower rates.
“If the data is too strong, then why do we break?” asked Torsten Slok, chief economist at Apollo Global Management, a wealth management firm. “I believe the Fed will not cut rates this year. Higher (rates) for longer is the answer.”
In March, central bank policymakers — as a group — penciled in three rate cuts for 2024, just as they did in December. Some economists still expect the Fed to deliver its first rate cut in June or July. But even at last month’s Fed meeting, some cracks had emerged: nine of the 19 policymakers predicted just two rate cuts or less for 2024.
Since then, Friday’s jobs data, along with an unexpectedly buoyant report showing factory output expanding again after months of contracting, suggest the economy is extending an unexpected run of healthy growth. Despite the Fed’s aggressive run of rate hikes in 2022 and 2023, which sent mortgage rates and other borrowing costs soaring, the economy is defying long-held expectations that it would weaken.
Such trends have made some Fed officials nervous. Although inflation has fallen sharply from its peak, it remains stubbornly above the Fed’s 2% target. Rapid economic growth could reignite inflationary pressures, undoing the progress made.
In a series of speeches this past week, several Fed officials emphasized that there was little need to cut rates anytime soon. Instead, they say, they need more information about exactly where the economy is going.
“It’s far too soon to think about cutting interest rates,” Lorie Logan, president of the Federal Reserve Bank of Dallas, said in a speech. “I will need to see more of the uncertainty resolved about what economic path we are on.”
Raphael Bostic, head of the Atlanta Fed, said he favors one rate cut this year – and not until the final 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.
“If we continue to see strong job growth,” Kashkari said, “if we continue to see strong consumer spending and strong GDP growth, then that raises the question in my mind, well, why would we cutting rates?”
However, a strong economy and employment, alone, may not necessarily prevent rate cuts. Chairman Jerome Powell and other officials, such as Loretta Mester, president of the Cleveland Fed, have underlined that the main factor in the Fed’s decision to cut rates is when – or if – inflation resumes its fall back to target 2 % of the central bank. . They point out that the economy has managed to grow rapidly in the second half of 2023 even while inflation has fallen steadily. Inflation is now just 2.5%, according to the Fed’s preferred measure, down from a peak of 7.1%.
Still, in January and February, “core” prices – which exclude volatile food and energy costs – rose faster than consistent with the Fed’s target, raising concerns that inflation has not been tamed’ n full
As a result, the government’s reports on inflation will be scrutinized for any signs that inflation is easing further. Wednesday’s consumer price index report is expected to show that core prices rose 0.3% from February to March, which is generally too fast for the Fed’s liking.
One reason why Powell doubts that the economy can continue to grow even as inflation cools is that the supply of workers has increased dramatically in 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 under control.
A surge in immigration in the past two years, most of it unauthorized, has dramatically increased the number of workers willing to fill jobs. Their entry into the job market has largely ended the labor shortage that the post-pandemic economy created and caused wages to increase for workers in retail, restaurants and hotels.
“There are a lot more people working,” Powell said at a discussion at Stanford University this week. “It’s a bigger economy, rather than a tighter one.”
Whether that trend of rising labor supply can continue this year will help determine the Fed’s next steps.
Still, speaking at a conference at the San Francisco Fed last month, even Powell acknowledged that the healthy economy lessens the urgency of rate cuts: “This economy doesn’t feel like it’s suffering from a current rates.”
Indeed, Slok and some Fed officials believe that borrowing costs are not holding back the economy as much as they would in the past. That’s because in today’s economy, a number of trends could keep growth, inflation and interest rates higher than in the last two decades. These include a more productive economy, larger government budget deficits and some manufacturing returning to the US, where it is more expensive, from overseas.
“It is extremely difficult to argue that the Fed should be cutting rates at all – and arguably the debate about raising rates again should be more lively than it currently is,” said Thomas Simons, economist at Jeffries, brokerage.
Christopher Rugaber, The Associated Press
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