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 above its target rate of 2 per cent. It kept raising rates until the middle of 2023, trying to cool off the economy and ensure that inflation came down.
As it turns out, the US economy still hasn’t cooled much, at least by the usual measures; the unemployment rate remains near a 50-year low. But inflation has plunged. Over the past six months, the core personal consumption expenditures deflator has risen at an annual rate of only 1.9 per cent, below the Fed’s target, and more complex measures are close to 2 per cent. Basically, the war on inflation is more or less over, and we won.
US Federal Reserve chairman Jerome Powell is expected to start cutting rates this year.Credit: AP
So why keep interest rates this high? Right now the US labour market looks a lot like it did on the eve of the pandemic, with both unemployment and other measures of market heat, like the rate at which workers are quitting, similar to what they were in late 2019. The Fed is projecting higher inflation over the next year than it was in 2019, but only slightly higher.
Back then, however, the federal funds rate, the interest rate the Fed controls, was 1.75 per cent. Now it’s 5.5 per cent. It’s really hard to come up with a good reason it should stay that high.
Why the US Federal Reserve may be Trump’s next target
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10.01.2024
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........
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