Dogs have their days, and so do economists.
When it comes to predicting the Fed’s interest rate policy for the rest of the year, economists are probably right and markets are probably wrong.
Believe me when I say it’s much more painful for us to write this than it is for you to read it. We share your skepticism about the professional judgment of economists.In particular, the consensus among economists about inflation in 2021, Fed policy in 2022, and the likelihood of a recession in 2023 was wildly off.
As the saying goes, every dog has its day. Economists seem to be right When we expect the Federal Reserve to cut interest rates at a gradual pace.
the result The Bloomberg News survey was released Friday. Four-fifths of the 51 economists surveyed expect the Fed to cut interest rates by just 0.25 percentage points at its September meeting. The median forecast puts the probability of a rate cut between this month’s meetings at just 10 percent.
Investors see a much higher probability of the Fed implementing more aggressive policy. Earlier this week, futures markets were pricing in a nearly 80% chance of a 50 basis point cut in September, or a 25 basis point cut between the August meetings followed by another 25 basis point cut in September. Those expectations have eased as Monday’s stock market panic subsided, but The market is still pricing in about a 50% chance of a 50 basis point cut in the target rate. than today after the next scheduled Federal Reserve meeting.
Absent an unexpected economic catastrophe, financial crisis, natural or public health disaster, or a sudden and significant escalation of the wars in the Middle East and Ukraine that have erupted under the Biden-Harris administration, intersessional cuts would be unprecedented. The Federal Reserve will only cancel meetings in the event of an emergency. or serious market dysfunction, not including an orderly sell-off of stocks or rising unemployment.
The Federal Reserve Should Act Carefully Ahead of the Election
In fact, the bar for raising prices between conferences is probably higher than it was before. Inflation picture remains uncertainInflation has been declining in recent months, including last year and then reversing earlier this year, and the Fed wants to avoid any moves that would be seen as reinvigorating inflationary pressures.
of The coming election It could also give the Fed pause: While the weak July jobs report likely created enough political space for the Fed to cut rates in September without appearing overly political (we still expect some rebound, but less than if the Fed had cut rates into an obviously strong labor market), the uncertainty around post-election federal policy could give the Fed reason to tread carefully.
A Democratic landslide victory in November is unlikely, but if it does happen, the resulting policy mix will almost certainly be inflationary. A victorious Democrat would implement tougher climate change regulationscurbing fossil fuels, and Green New Deal spending – all of which are inflationary.
Even if Democrats’ tax hikes are successful in raising revenues as much as they claim (and tax hikes often fall short of their proponents’ projections), they are unlikely to curb inflation, and Democrats are more likely to spend the additional revenues rather than use them to reduce the deficit.
More importantly, even if they were successful in reducing the deficit, the tax increases they are promoting would do nothing to curb inflation — and would likely make it worse. Raising income tax rates on the wealthy won’t reduce consumer demand The reason is that most of the tax money was not meant to be spent on consumer goods. But taxes reduce investment and economic output. Similarly, raising corporate taxes may increase government revenues, but it does little to reduce inflationary pressures. Instead, it restricts supply by reducing the incentive to produce more, which increases inflationary pressures.
While many analysts and media outlets have reported that Donald Trump’s policy proposals could cause inflation, we see quite the opposite: Increasing incentives for investment in the form of tax cuts tends to increase production. Contrary to the rituals of the world trade bureaucrats, Tariffs will curb inflationPresident Trump has directed his economic advisers to find ways to reduce the deficit through cuts in domestic discretionary spending, which would also have a deinflationary effect.
Until the Fed has a better sense of how the political winds are blowing, It’s much safer to cut slowly and carefully..
Slower and longer
Looking further ahead, 51 economists surveyed by Bloomberg expect a combined 75 basis points of rate cuts by the end of the year, which would amount to a quarter-point cut at each of the three remaining Fed meetings. Markets are pricing in around 100 basis points. 125 basis points likelyThis will lower the target range for the federal funds rate from 5.25% to 5.50% to 4.00% to 4.25%.
Both are likely overestimating the size of the Fed’s rate cuts this year. We currently expect the Fed to cut rates in September and then a second time in December. The Fed will not attend its November meeting, which is two days after Election Day. November is likely to be a volatile period socially, politically and in markets. The Federal Reserve is taking a wait-and-see approach.
