When will the Fed cut interest rates? While the US economy flexes its muscles, perhaps later or not at all

WASHINGTON (AP) — Since the Federal Reserve signaled last fall that interest rates were likely to rise, Wall Street traders, economists, car buyers, would-be homeowners — almost everyone — have begun to obsess over one question: When will… Raising interest rates? Will the Fed start cutting interest rates?

But now, with the US economy showing surprising strength, a different question has arisen: Will the central bank cut interest rates three times this year, as the European Central Bank has done? The Fed itself predicted – Or even cut at all? The Fed usually only cuts interest rates when the economy appears to be weakening and needs help.

Lower interest rates would reduce borrowing costs for housing, cars and other major purchases and possibly lead to higher stock prices, all of which would help accelerate growth. A stronger economy may also benefit President Joe Biden's reelection campaign.

Friday Popular Jobs Report March reinforced the idea that the economy is managing well on its own. The government said employers added a big boost of jobs last month — more than 300,000 jobs — and the unemployment rate fell to a low of 3.8% from 3.9%.

Some analysts responded by saying that it was clear that the last thing the economy needed now was more stimulus from lower interest rates.

“If the data is so powerful, why reduce it?” asked Torsten Slok, chief economist at Apollo Global Management, a wealth management firm. “I think the Fed will not cut interest rates this year. The answer is higher (rates) for longer.

In March, central bank policymakers — as a group — had envisioned three interest rate cuts for 2024, just as they did in December. Some economists still expect the Fed to make its first rate cut in June or July. But even in Fed meeting last monthHowever, some cracks have appeared: nine of 19 policymakers expect only two rate cuts or less for 2024.

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Since then, Friday's jobs data, as well as an unexpectedly buoyant report showing factory output expanding again after months of contraction, signaled that the economy is extending an unexpected period of healthy growth. Despite the Fed's series of interest rate hikes in 2022 and 2023, which sent mortgage interest rates and other borrowing costs higher, the economy is defying long-term expectations that it will weaken.

Such trends have made some Fed officials nervous. Although inflation has fallen sharply from its peak, it remains stubbornly above the Fed's 2% target. Rapid economic growth could reignite inflationary pressures, undoing the progress achieved.

in A large number of sermons Last week, several Fed officials stressed that there is little need to cut interest rates anytime soon. Instead, they said they need more information about exactly where the economy is headed.

“It is too early to think about cutting interest rates,” Dallas Fed President Lori Logan said in a speech. “I will need to see a resolution to further uncertainty about the economic path we are on.”

Raphael Bostic, president of the Federal Reserve Bank of Atlanta, said he prefers to cut rates just once this year — and not until the final three months. Minneapolis Fed President Neel Kashkari sent stock prices tumbling Thursday afternoon after raising the possibility that the Fed might not cut interest rates at all this year.

“If we continue to see strong job growth, if we continue to see strong consumer spending and strong GDP growth, it raises the question in my mind, ‘Well, why are we lowering interest rates?’” Kashkari said.

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However, a strong economy and employment, in and of themselves, may not necessarily prevent interest rate cuts. Fed Chairman Jerome Powell and other officials, such as Loretta Mester, president of the Cleveland Fed, have emphasized that a key factor in the Fed's decision to cut interest rates is when — or whether — inflation will resume its decline to the central bank's 2% target. . . They point out that the economy managed to grow rapidly in the second half of 2023 even as inflation declined steadily. Inflation is fair 2.5% now, according to the Fed's preferred measuredown from its peak of 7.1%.

However, in January and February, “core” prices – which exclude volatile food and energy costs – rose more quickly than was consistent with the Fed’s target, raising concerns that inflation was not fully tamed.

As a result, upcoming government reports on inflation will be scrutinized for any signs that inflation is falling further. Wednesday's report on the Consumer Price Index is expected to show that core prices rose 0.3% from February to March, a rate generally too fast for the Fed's liking.

One reason Powell doubts that the economy can continue to grow even as inflation declines is that the supply of workers has risen in the past two years. This trend makes it easier for the economy to produce more and avoid shortages even when demand remains strong. It also helps keep wage and price growth under control.

High rates of immigration in the past two years, much of it unauthorized, have led to a significant increase in the number of workers wanting to take up jobs. Their entry into the labor market has mostly ended the labor shortage that roiled the economy after the pandemic and caused wages for workers in retail, restaurants and hotels to soar.

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“There are a lot more people working,” Powell said at a discussion at Stanford University this week. “It's a bigger economy, not a tighter economy.”

Whether this trend of rising labor supply can continue this year will help determine the Fed's next steps.

He still speaks in A Federal Reserve Bank conference in San Francisco last monthPowell even acknowledged that a healthy economy reduces the urgency of lowering interest rates: “This economy does not appear to be suffering from the current level of interest rates.”

In fact, Slok and some Fed officials believe that borrowing costs are not constraining the economy as much as they would have in the past. This is because in today's economy, there are many trends that could keep growth, inflation, and interest rates higher than they have been in the past two decades. These include a A more productive economyThe larger government budget deficit and the return of some manufacturing to the United States, where it is more expensive, than abroad.

“It is very difficult to make the case that the Fed should cut interest rates at all – and arguably the debate about raising rates again should be more lively than it currently is,” said Thomas Simons, economist at brokerage Jefferies. “.

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