The Federal Reserve’s Rate Cut Dilemma: Inflation and the looming US Presidential Election
The anticipation for the Federal Reserve to decrease interest rates after raising them to a 23-year high has been a topic of great expectation among Wall Street. However, recent disappointing inflation readings have brought uncertainty to this scenario (News Finder Business).
If economic data continues to reflect the same trends, the Federal Reserve might delay the first rate cut into the fall. Even with a US presidential election scheduled for November 2024, this could still be a possibility (Forbes).
Currently, traders predict that the first rate cut is most likely to occur in June, as per futures. Although some investors also bet on July, the Fed’s officials have stated they will only reduce rates once they possess sufficient confidence that inflation has stabilized (The Wall Street Journal).
Apart from controlling inflation, the Fed could cut interest rates if the economy weakens and unemployment increases significantly. The central bank has also indicated that it won’t wait for annual price growth to drop all the way down to its 2% target (CNBC).
However, persistent inflationary pressures in housing and services are making the Fed hesitant. Despite private-sector data indicating a decrease in rents over the past year, the impact has yet to be reflected in inflation gauges (The Economist).
High housing costs and a sharp increase in gas prices contributed about 60% of the monthly price surge in February, according to the Consumer Price Index (CPI). Similarly, the Fed’s preferred inflation measure – Personal Consumption Expenditures price index – has shown that services prices have not moderated as much as hoped (The New York Times).
Reason for the slow moderation in service prices could be due to the economy’s robust performance maintaining some upward pressure on prices or the rate increases not yet permeating the broader economy.
The economic landscape in June, let alone September and November, remains unclear. However, there is a possibility that inflation might stall, potentially putting the Fed in a challenging position of cutting rates during the fall and a US presidential election.
As stated by Kathy Bostjancic, chief economist at Nationwide, “The Fed is supposed to be an apolitical institution, but they’re in Washington, so they’re not immune to talks about the election or feeling pressured to some degree.” Nevertheless, Bostjancic believes that “the Fed has all the cover it needs to cut rates around that time if it’s clear that the economic data are driving the decision.”
Economists hold firm faith that the Fed will eventually make this cut in the fall, as required. Jerome Powell, the Fed Chair, has consistently advocated for an apolitical approach to policy-making, declining to comment on political issues affecting the economy (CNBC).
A 1987 study by political scientist Nathaniel Beck indicates that the Fed has not influenced policy to favor presidential reelections and responded passively to fiscal policies, whether politically inspired or not.
Despite immense political pressure, the Fed has remained unyielding to criticism. However, it’s essential to recognize that their mandate is to focus on economic data rather than politics.
The National Association of Realtors recently announced a settlement agreement worth $418 million to end antitrust lawsuits, which could potentially reduce real estate commissions by 25-50% and disrupt the existing homebuying and selling business model (CNBC).
Monday: National Association of Home Builders releases its NAHB/Wells Fargo Housing Market Index for March, along with the Bank of Japan’s latest interest rate decision and the Reserve Bank of Australia’s interest rate decision.
Tuesday: US Commerce Department releases February data on housing starts and building permits.
Wednesday: Earnings from Micron Technology, General Mills, Prudential, Five Below, Tupperware, and the Federal Reserve’s latest interest rate decision accompanied by a fresh set of economic projections and Chair Jerome Powell’s press conference.
Thursday: Earnings from Accenture, Nike, FedEx, lululemon, Darden Restaurants, FactSet, Academy Sports and Outdoors, Kirkland’s, Bank of England’s latest interest rate decision, US Commerce Department reports on the country’s current account deficit for Q4 2023, and the US Labor Department releases new applications for jobless benefits in the week ended March 23. S&P Global reports March business surveys gauging economic activity in the US manufacturing and services sectors, and the National Association of Realtors reports on the number of existing-home sales in February.
