I have been saying for quite a while that there is no reason for the Federal Reserve to cut the fed funds rate, since inflation is not declining, hiring remains strong and the economy is growing well. There’s no evidence that the current fed funds rate is restricting the economy or suppressing inflation.
Now the mainstream media is agreeing. There’s nothing more mainstream than the WSJ Editorial Board.
A Question for Jerome Powell: Why Cut Interest Rates Now?
Progress against inflation has stalled, and financial conditions hardly seem restrictive.
By The Editorial Board, The Wall Street Journal, Updated Dec. 16, 2024
…
Long bond yields popped after Mr. Powell’s September rate cut and they haven’t come down. The 10-year Treasury remains 4.4%. The Chicago Fed’s indices of financial conditions have registered loose for some time and are getting looser. There’s no shortage of money around. What makes Mr. Powell think monetary policies are restrictive?
Perhaps part of Mr. Powell’s worry is simply that markets expect a rate cut this week and might react badly if he doesn’t deliver. Investors have placed big bets on the prospect of a cut, to judge from the fed funds futures market. But so what? A far bigger blow to Fed credibility would be if he has to raise rates next year because inflation continues to be stubborn… [end quote]
Dealbook, by Andrew Ross Sorkin, The New York Times, December 17, 2024
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The final cut (for now)?
The Fed is set to wrap up its last policy meeting of the year tomorrow, with markets essentially convinced that the central bank will lower interest rates for a third time since September…
What Wall Street is predicting: The futures market this morning was pricing in about 80 percent odds of the Fed holding fire on rates at the January meeting.
A number of economists see the central bank cutting its benchmark lending rate three times next year… [end quote]
That compares with 4 expected cuts by the FOMC in September.
The so-called neutral rate is the holy grail, a level that neither spurs nor slows economic activity. But figuring out where that rate falls isn’t straightforward, and economists have a range of estimates.
The closer the Fed moves to estimates of neutral, the weaker the case gets for cutting if inflation firms up and the labor market doesn’t weaken…
Moreover, even with another quarter-point cut, rates would still be above most plausible estimates of neutral, which run from around 2.5% to 4%. The Fed’s benchmark federal-funds rate is currently around 4.6%… [end quote]
There are a lot of moving parts since the Trump administration can unilaterally increase tariffs and begin deportations from the first day of his administration. Both would be inflationary. But the Fed doesn’t move on speculation about political events. Not to mention the separate issue of fiscal stimulus by Congress (including possible tax cuts).
Investors are being warned not to front-run the Fed since predicted rate cuts are becoming less likely.
Wendy