The Federal Reserve Board A new easing cycle This week, the Federal Reserve Board cut the federal funds rate by half a percentage point at its Federal Open Market Committee meeting. Market participants took the news in stride, as they had expected the Fed to cut rates by that amount, not a quarter of a percentage point.
in Press Conference After the meeting, Fed Chairman Jerome Powell suggested that the move reflected growing confidence that the Fed's 2% inflation target is achievable while the labor market has cooled over the past three months. As a result, the balance of inflation and unemployment risks has shifted toward ensuring that the job market does not worsen too much.
The biggest unknown at this point is what the future path of monetary easing will be. According to Bloomberg's John Authors: The impetus from the 50 basis point rate cut has evaporated Powell dismissed the notion that further significant rate cuts are on the way, suggesting that given the strength of the economy, it shouldn't be assumed that this is the pace of future rate cuts.
of Median forecast By the end of next year, I expect the federal funds rate to fall to around 3.25% to 3.5%, closer to the 3% that the bond market is pricing in. If that happens, first time The Fed has not cut interest rates aggressively, as it did after the bursting of the tech and housing bubbles and the COVID-19 pandemic.
The main reasons the Fed is unlikely to act so quickly this time are that a recession does not appear to be imminent and there are few signs of stress in financial markets and the banking system.
Beyond that, there is little historical experience to guide policymakers and investors. The current economic cycle is unique in U.S. historyAs economists at the Federal Reserve Bank of Richmond point out, this is the first business cycle since the end of the war to have seen significant progress in falling inflation without a corresponding rise in unemployment.
but, Financial market volatility is on the rise Nonfarm payrolls have fallen sharply over the past two months, with data showing job growth slowing, so while the nonfarm sector added 142,000 jobs in August, estimates for the prior two months were revised down by a net 86,000.
That has fueled investor fears that the economy could weaken, but Fed officials expect the unemployment rate to rise only slightly, to 4.4% from the current 4.2% median forecast for this year and next.
Fed officials have stressed that their decisions will be data-driven, but investors are aware that this means they will be “lagging behind” in responding to the risks of a recession. For example, According to BankAmerica's latest global fund manager survey: Respondents believe that global monetary policy is the toughest since the 2008 financial crisis. However, a majority of respondents believe that a “soft landing” in the United States is the most likely outcome.
The Fed's justification for cutting rates in these circumstances is that, as inflation approaches the Fed's 2% target, monetary policy should be neutral, not contractionary.
In my view, a soft landing would see real interest rates fall to around 1%-1.5% from around 3% before the Fed eased. Assuming inflation moves closer to 2% over time, that would mean a final fed funds rate of around 3%-3.5%.
One lesson from the post-pandemic economy is that the Fed also needs to consider the role of fiscal policy: Massive federal programs totaling $4.6 trillion were enacted during the pandemic to support households as businesses were closed, but they also contributed to a spike in inflation in 2021 and 2022.
The problem looming in 2025 isTax Cuts and Jobs Act of 2017Whether the tax system is extended and expanded as proposed by Donald Trump, or taxes on corporations and the wealthy are raised as supported by Kamala Harris, the outcome could either provide a further stimulus to the economy or put a strain on it.
Moreover, assessing the budgetary impact of presidential campaign plans is particularly difficult right now.
Much of Kamala Harris' tax policy remains vague, and she has not indicated how her spending priorities would align with the current 2025 budget proposal. According to Bloomberg, Donald Trump A patchwork of tax cuts The total could reach $10.5 trillion over 10 years, but a bill that big is unlikely to pass and could be partly offset by increased tariff revenues.
Given the significant differences in economic policy and the proximity of the upcoming election, it is very difficult to assess its impact on the economy at this time, but the Fed will need to consider the impact on the economy and monetary policy conduct once the election results are known and the outlook for fiscal policy becomes clearer.
Dr. Nicholas Sagen is an economic consultant with Fort Washington Investment Advisors and is affiliated with the University of Virginia Darden School of Business. He said:“Investing in the Trump Era: How Economic Policies Affect Financial Markets”
