One of life’s greatest—and most dangerous—temptations is to confuse one’s expectations with one’s hopes. The financial community seems to have succumbed to this. Despite what the Federal Reserve has said about its intentions, people have begun discussing imminent interest rate cuts. Such a policy change is, of course, possible. A recession could develop suddenly. Even without convincing economic weakness, the Fed has done rash and irresponsible things in the past. In 2021, for instance, it ignored clear inflationary signs and refused to act for months. But such rash behavior is unlikely now. If the Fed cuts interest rates in 2024, it will do so later rather than sooner. Nothing imminent is at all likely.
For the moment, the Fed faces no economic pressure to change policy, except perhaps from the chattering in the financial media. Though containing areas of significant weakness, the economy exhibits no urgent need for policy relief. Unemployment stands near historic lows, and though the pace of hiring has slowed from earlier in the year, it remains strong enough to relieve even the most nervous policymaker. The third quarter’s real gross domestic product (GDP) showed a surprisingly strong 5.2 percent annual pace of growth. And though areas of weakness were evident behind the bright headlines, the overall picture demands no Fed change.
Nor is there any political pressure on the Fed. Typically, it is political pressure, usually from the White House, that prompts the Fed to make ill-considered and rash shifts. But far from demanding Fed help, the Biden administration characterizes the economic picture as a reason to brag about the success of “Bidenomics.” Political pressure might coalesce as the election approaches, especially if signs of economic weakness emerge. Still, there is neither reason for it now nor indications of what might create such pressure.
To be sure, inflation has moderated significantly from the highs of mid-2022. In June of that year, the cost of living, according to the Labor Department’s Consumer Price Index (CPI), was up more than 9 percent over the prior twelve months. This past October, the most recent period for which data are available, the index showed only a 3.2 percent rise over the previous twelve months. That is an impressive improvement and a reason for relief of sorts. But the inflation rate is still well above the Fed’s acceptable target of 2 percent a year. Fed Chairman Jerome Powell has clarified that he will not consider backing off their counter-inflationary stance until they are sure that inflation has slowed securely to that target. Powell, the Fed’s staff, and other policymakers are well aware that the great inflation of the 1970s and 1980s persisted as long as it did because, on several occasions, the Fed declared victory and eased its counter-inflationary stance too soon.
Far from securely in its target range, it is not even evident that inflation will remain as moderate as it was in October. For instance, in just the last three months, the CPI has varied between annual rates of 7.5 percent and 2.4 percent. Even the so-called “core” rate of inflation, which excludes the sometimes-wild swings in food and energy prices, the inflation rates recorded in just these last three months varied between 2.4 percent and about 4 percent. Other measures of living costs, such as the GDP deflator, have actually accelerated. The spring quarter looked very encouraging, with a 1.7 percent annual inflation rate, but the more recent summer quarter saw the rate jump to 3.5 percent. Such variability surely convinces policymakers of the risk of declaring victory too soon.
Some see the pause in Fed rate hikes as a prelude to impending cuts. Chairman Powell has, however, explained matters in a very different way. He characterizes the pause as a way for policymakers to assess the lagged economic effects of what they have already done. The chairman has made clear that once they have made that assessment, they may have to raise interest rates again. It all depends, he has explained, on the flow of information on the economy and inflation. Whether the Fed raises rates again or not, Powell warns that he and his colleagues at the Fed will keep interest rates high until they have secured inflation close to their 2 percent target. People have no reason to doubt his word.
Over the next few months, the Fed may receive the good news on inflation it seeks. Alternatively, policymakers may get bad news on the economy sufficient to persuade them to take the risk of giving up their inflation fight early. In either case, it will take several months of compelling confirmation to get the Fed to move toward rate cuts. That puts the hope of any such policy change into the summer of next year at the earliest and, more likely, not until the last quarter of the year, maybe not until 2025.
Milton Ezrati is a contributing editor at The National Interest, an affiliate of the Center for the Study of Human Capital at the University at Buffalo (SUNY), and chief economist for Vested, the New York-based communications firm. His latest books are Thirty Tomorrows: The Next Three Decades of Globalization, Demographics, and How We Will Live and Bite-Sized Investing.
Will the Fed Reserve Cut Interest Rates Next Year?
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01.12.2023
One of life’s greatest—and most dangerous—temptations is to confuse one’s expectations with one’s hopes. The financial community seems to have succumbed to this. Despite what the Federal Reserve has said about its intentions, people have begun discussing imminent interest rate cuts. Such a policy change is, of course, possible. A recession could develop suddenly. Even without convincing economic weakness, the Fed has done rash and irresponsible things in the past. In 2021, for instance, it ignored clear inflationary signs and refused to act for months. But such rash behavior is unlikely now. If the Fed cuts interest rates in 2024, it will do so later rather than sooner. Nothing imminent is at all likely.
For the moment, the Fed faces no economic pressure to change policy, except perhaps from the chattering in the financial media. Though containing areas of significant weakness, the economy exhibits no urgent need for policy relief. Unemployment stands near historic lows, and though the pace of hiring has slowed from earlier in the year, it remains strong enough to relieve even the most nervous policymaker. The third quarter’s real gross domestic product (GDP) showed a surprisingly strong 5.2 percent annual pace of growth. And though areas of weakness were evident behind the bright headlines, the........
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