Biden declines, Fed to close in September
The announcement was President Biden has suspended his campaign With President Trump seeking a second term, the Federal Reserve will be under pressure to hold off on raising interest rates until after the election.
The U.S. economy currently appears to be growing at a healthy pace in the second quarter and is not overheating, but it is not in recession either. Retail Sales, Nonfarm Payrolls, Industrial Production Both figures beat expectations in June, dispelling claims that the economy was on the brink of a dangerous slowdown or that Fed policy was already too tight.
of Atlanta Fed GDPN0w They project economic growth of 2.7%, which is probably an overestimate but not far from the private sector’s projection of 2.4% growth. Econoday’s consensus forecasts for GDP are 1.8% and the Dow Jones Industrial Average are 1.9%, but these are based on past projections. Goldman Sachs projects second-quarter economic growth of 2.2%, while Bank of America projects 2.3%.
What’s more, many on Wall Street are increasingly betting that growth will continue to accelerate in the second half of the year: Goldman, for example, sees the economy expanding about 2.5% in the final six months of the year, with growth rising to 2.2% from Q4 2023 to Q4 2024.
That’s the check mark on Median forecast growth rate of 2.1% It’s stated in the Federal Reserve’s June Economic Outlook Summary. The way to think about this outlook is that it tells us what Fed officials think the appropriate policy rate would be if the economic data (inflation, employment, growth) turns out as expected.
Members of the Federal Reserve Board attend the Fed Listens event in Washington, DC on March 22, 2024. (Board of Governors of the Federal Reserve System via Flickr)
In projections released last month, Fed officials said they planned to set the federal funds rate at 5.1% if the economy grew 2.1% over the past four quarters, meaning it would be in the range of 5% to 5.25%, 0.25 percentage point lower than their current target. The unemployment rate is about 4%The personal consumption expenditures (PCE) price index increased 2.6% over the past 12 months, while core PCE inflation increased 2.4%.
We believe there are upside risks to both unemployment and inflation, but at this point, all of these projections are pretty reasonable. If you expect the economy to perform roughly in line with Fed officials’ projections, We expect the policy rate to be at the level envisaged by the Fed.But the market isn’t expecting that: instead of one rate cut, it’s expecting two or three, with a 90%+ chance that the first cut will come in September.
More turmoil, more uncertainty, more reasons to wait for interest rate cuts
In previous versions Breitbart Business Digest, We have explained at length why we believe the market will be wrong about the extent of rate cuts and why its confidence about the start of rate cuts is misplaced. Biden decides to drop out of 2024 presidential race and endorse Vice President Kamala Harris Our confidence in this view is further increased.
at least, The sudden change in consensus about Biden’s intelligence and subsequent abandonment of his candidacy It’s a reminder that our political future is currently very unstable. Not so long ago, mainstream media claimed that evidence of Biden’s weakness was deepfake propaganda. Then Biden supporters said he had just had a bad night. Then Biden himself said he was confident he would beat Donald Trump in November and was determined to continue the campaign.
This political uncertainty means that it is impossible to predict with a high degree of confidence what economic policy the U.S. government will pursue next year, or over the next three years. A cut in September would reduce that uncertainty. Even though there are multiple possible political outcomes, each of which would likely result in a policy combination that the Fed would view as more inflationary.
Many Fed officials No suspension or resumption of monetary policy It is natural to worry that the Fed’s ability to reverse policy immediately after one or two rate cuts would undermine confidence in its ability to do so. Pre-election cuts increase the risk of post-election reversals—A risk that can be avoided by simply waiting one more meeting.
We don’t expect the Fed to explicitly cite Biden’s withdrawal from the presidential race as a reason to back off its September forecasts, although if the Fed were to try to reset market expectations, they would do so. Regardless of the political situationBut Fed officials are aware of what’s going on in American politics and are likely to wait to see how this all plays out before moving interest rates.
