Song of interest rates and recession
Winter isn’t coming anymore.
phrase “Winter is coming” is the motto of House Stark. George R.R. Martin’s song of fire and ice series and game of thrones The TV show that inspired it. It’s a warning of difficult times ahead and the inevitable return of the long winter that the fictional land of Westeros is known for.
But in the area of the Federal Reserve and monetary policy, the economic downturn that was expected to prompt interest rate cuts appears to be melting before our eyes.
The false winter of leading indicators
of leading economic index has been sounding the alarm about an impending financial winter for two years. On Monday, the Conference Board released January statistics, showing the 22nd consecutive decline. This is the longest consecutive decline in the index since the global financial crisis, and the third-longest on record.
Still, after many twists and turns, conference board Currently, the forecast barometer says that it does not indicate an imminent recession. Instead, we see indicators showing a slowdown to zero growth, but not an actual contraction.
larry summersHe correctly warned that the Biden administration’s aggressive expansion of the American Rescue Plan in 2021 would lead to inflation, and recently said there is a “meaningful” possibility that the Fed’s next action will be to raise rates rather than cut them. It pointed out. This is our position at Breitbart Business Digest, arguing that the market’s obsession with when the Fed will cut rates overlooks risks such as: The Fed may not cut rates at all, or it may end up raising them..
“These data certainly challenge the assumption that inflation will decline to 2% in a calm, healthy real economy,” Summers said. interview with bloomberg tv wall street week.
Monetary policy is not as tight as it seems
former Bill Dudley President of the Federal Reserve Bank of New York claimed A Bloomberg Opinion article on Monday said recent economic data suggests the current monetary policy stance may not be as tight as generally thought.
Perhaps monetary policy has not been tightened that much. This means that a neutral inflation-adjusted rate (a level that neither stimulates nor restrains growth) could be higher than Fed officials’ estimate of 0.5%, which is the current federal funds rate. This means that it does not suppress growth. I think this is correct. Large and chronic budget deficits and public subsidies for green investments are pushing up the neutral interest rate. If that’s the case, the Fed will need to keep interest rates steady for longer.
This view challenges calls for rate cuts and suggests that the economy may need a prolonged period of rate hikes to sustainably bring inflation down to the Fed’s 2% goal. ing.
This is the view we have defended here, and it appears to be shared by the following countries: Neel Kashkari of the Minneapolis Fed.
There’s still a chance the economy will unexpectedly weaken enough to justify a rate cut this year. It is impossible to survive the past 30 years without this knowledge. unexpected economic development This can be very costly.
However, domestic and global economic and geopolitical developments are both moving in opposite directions. US fiscal policy is expected to remain expansionary at least until the November election.The war in Ukraine shows no signs of slowing down, but the possibility cannot be ruled out. “October Surprise” attempt The Biden administration has declared peace in the region. Attacks on commercial ships in the Red Sea continue to disrupt global shipping. Each poses a risk of upward pressure on inflation.
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Mark ZandiMoody’s Analytics’ chief economist is still waving the flag for rate cuts.
The Fed should not continue lowering interest rates any further. The dual mission of a full-employment economy and low and stable inflation has largely been achieved. That makes it difficult to justify the current 5.5% funds rate, which is 3 percentage points higher than the Fed’s own r-star forecast.
— Mark Zandi (@Markzandi) February 18, 2024
This seems like it would go completely backwards.If the economy is producing Full employment at current interest rates, Why should the Fed cut interest rates?Mr. Zandi seems to believe that the interest rate is correct. should Therefore, the Fed should cut rates unless there is a strong reason not to.
It is true that the Fed’s own projections suggest that the long-term policy rate is 2.5%. However, it was only in June 2019 that the Fed began projecting this as the long-term policy rate. Ten years ago, the Fed predicted long-term interest rates would be 4%. Perhaps the economy is just returning to: the “normalized” rate is simply higher More than the Fed thought it would in the year before the pandemic hit.
of January FOMC meetingThe Fed’s choice to wait was a declaration of sorts that it would refuse to bow to the pressures of the moment without “further confidence” that inflation would return to its target. There’s nothing in recent economic data to make us even more confident that inflation will head towards his 2%.
in game of thrones It turns out the Starks were right. Winter is coming. But it takes a very long time to arrive. At some point, the economy will fall into recession again. But there are few signals that that day is near.
