When will the Fed cut rates? As the US economy flexes its muscles, perhaps later or not at all – KGET 17

WASHINGTON (AP) Since the Federal Reserve signaled last fall that it was likely done raising interest rates, Wall Street traders, economists, car buyers and would-be homeowners have begun to obsessing over one question: When will the Fed start cutting interest rates? rates?

But now, with the U.S. economy showing surprising strength, another question arises: Will the central bank really cut rates three times this year, as the Fed itself has predicted? , or even reduce them at all? The Fed generally only cuts rates when the economy appears to be weakening and needs help.

Lower interest rates would reduce borrowing costs for homes, cars and other major purchases and would likely fuel higher stock prices, which could help accelerate growth. An even more robust economy could also benefit President Joe Biden's re-election campaign.

Friday's jobs report for March reinforced the view that the economy is doing pretty well on its own. The government said employers created a huge burst of jobs last month, more than 300,000, and the unemployment rate fell to 3.8% from 3.9%.

Some analysts have responded by arguing that it is clear that the last thing the economy needs right now is more stimulus through lower rates.

If the data is too strong, why are we cutting back? asked Torsten Slok, chief economist at Apollo Global Management, a wealth management firm. I think the Fed will not cut rates this year. Higher rates for longer are the answer.

In March, central bank policymakers as a group predicted three 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 at last month's Fed meeting, some cracks had appeared: Nine of 19 policymakers forecast only two or fewer rate cuts for 2024.

Since then, jobs data released Friday, combined with a surprisingly positive report showing industrial production is rising again after months of contraction, suggest the economy is continuing an unexpected period of healthy growth. Despite the Fed's aggressive series of rate hikes in 2022 and 2023, which have driven up mortgage rates and other borrowing costs, the economy is defying long-held expectations that it would weaken.

Such trends have made some Fed officials nervous. Even though inflation is down sharply from its peak, it remains stubbornly above the Fed's 2% target. Rapid economic growth could reignite inflationary pressures, reversing the progress made.

In a series of speeches last week, several Fed officials stressed that there was no need to cut rates in the near future. Instead, they said, they need more information about exactly where the economy is headed.

It's far too early to think about cutting interest rates, Lorie Logan, president of the Federal Reserve Bank of Dallas, said in a speech. I will need to see more dissipation of uncertainty about the economic trajectory being followed.

Raphael Bostic, head of the Atlanta Fed, said he favors only one rate cut this year and not before the last three months. And Neel Kashkari, president of the Minneapolis Fed, sent stock prices tumbling Thursday afternoon after raising the possibility that the Fed might not cut at all this year.

If we continue to see strong job growth,” Kashkari said, “if we continue to see strong consumer spending and strong GDP growth, then that raises the question in my mind: why would we cut jobs? rate ?

Yet a strong economy and hiring alone do not necessarily rule out rate cuts. Chairman Jerome Powell and other officials, such as Cleveland Fed President Loretta Mester, have stressed that the main factor in the Fed's decision to cut rates is when or if inflation will resume its decline toward the central bank's 2% target. They note that the economy managed to grow rapidly in the second half of 2023, even as inflation fell steadily. Inflation is now just 2.5%, according to the Fed's preferred measure, down from its peak of 7.1%.

Yet in January and February, underlying prices, excluding volatile food and energy costs, rose faster than consistent with the Fed's target, raising concerns that inflation could has not been completely mastered.

As a result, the government's upcoming inflation reports will be closely scrutinized for any signs of a further slowdown in inflation. Wednesday's Consumer Price Index report is expected to show that underlying prices rose 0.3% between February and March, which is generally too fast for the Fed's liking.

One reason Powell suspects the economy can continue to grow even as inflation calms is that the supply of workers has soared over the past two years. This trend allows the economy to produce more and avoid shortages, even when demand remains strong. This also helps to contain wage and price growth.

A wave of immigration over the past two years, most of it unauthorized, has dramatically increased the number of workers willing to take jobs. Their entry into the workforce has largely ended the labor shortages that plagued the economy after the pandemic and caused wages to rise for retail, restaurant and hotel workers.

There are a lot more people working, Powell said during a discussion at Stanford University this week. This is a bigger economy, rather than a tighter one.

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

Yet at a conference at the San Francisco Fed last month, even Powell acknowledged that a healthy economy reduces the urgency for rate cuts: “This economy doesn't feel like it's hurting at the current level.” rates. »

Indeed, Slok and some Fed officials believe borrowing costs aren't holding back the economy as much as they would have in the past. Indeed, in today's economy, several trends could keep growth, inflation and interest rates higher than in the past two decades. These include a more productive economy, larger government budget deficits and the return of some manufacturing industries to the United States, where they are more expensive, from abroad.

It's extremely difficult to make the case that the Fed should cut rates, and the debate over further rate hikes should be more heated than it is now, said Thomas Simons, an economist at Jeffries, a brokerage.