Interest rates in the world’s largest economy are heading down. Maybe not today, and maybe not tomorrow, but soon, and for the rest of this year (at least).
Why? Because there are very good reasons for the US Federal Reserve, which controls short-term interest rates — that’s how it makes monetary policy — to start reversing the sharp rate hikes it carried out beginning in March 2022. There’s a vigorous debate about whether those rate hikes were excessive, which I’m not going to litigate here. Whatever you think about past policy, the case for cuts going forward is very strong, and I hope the Fed will act on that case.
Former US president Donald Trump could be looking to pressurise the Federal Reserve.Credit: AP
What I don’t know is whether the Fed is ready for the political firestorm it’s about to face and whether it will stand up to the pressure to keep rates too high for too long. Because it’s a safe prediction that Donald Trump and his supporters will scream that the coming rate cuts are part of a deep-state conspiracy to reelect President Joe Biden.
Let’s talk first about the economics, which should, but might not, be the only thing guiding the Fed’s decisions.
The Fed raised rates in an attempt to rein in inflation in the US, which was running hot at the time. Its preferred measure of underlying inflation was running far........