the US economy is too strong to cut rates

President Joe Biden was hoping for a boost from the Federal Reserve this year. On Wednesday, the Fed dealt a major blow to those hopes.

Jay Powell, chairman of the central bank, confirmed what many have suspected for some time: interest rate cuts in the world's largest economy are not imminent. The economy remains too buoyant to begin easing monetary policy and the federal government's mission to return inflation to its 2 percent target is not over.

The high borrowing costs that American voters complain about are likely to last at least until the presidential election in November.

This poses a dilemma for Biden and Powell. The American economy is strong: it is running at a faster pace than other advanced economies and is close to full employment. But that strength is a key reason why the Fed will likely leave rates higher than voters, or the president, would like.

The Federal Open Market Committee admitted as much on Wednesday in Washington, noting that it had made little progress in recent months toward meeting the central banks' inflation target. The wording of his statement all but rules out a cut in June, at the Fed's next meeting.

High rates would need more time to do their job, Powell said, and it would take longer for policymakers to be confident enough to start making remarks that immediately cast doubt on the July cuts as well.

That leaves the world's most important central bank in a delicate position ahead of the election between Biden and Donald Trump. Rate cuts late in the election campaign could appear to favor Biden. Not cutting spending could help Trump.

Powell insisted at his post-meeting news conference that central bank rates would not be set according to this year's policy calendar. That leaves a cut at the September Fed meeting in play, although analysts say that move would be too close to the Nov. 5 vote.

This will take place between two presidential debates, said Vincent Reinhart, chief economist at Dreyfus and Mellon, referring to the September 18 FOMC vote. The FOMC, rightly, is concerned about public reception of its actions. At the time of an election, the public can be confused about their intentions. You need to choose a location where you are sure the audience will understand why you do what you do.

Approaching the election with the U.S. benchmark borrowing cost in the 23-year high range of 5.25 to 5.5 percent, and with mortgage rates and credit card interest levels much higher, would deal a blow to Biden's efforts to win over voters who believe the economy was stronger under Trump.

The fact that the Fed has now been forced to keep rates higher for even longer is a grim reminder that, for almost all of Biden's first term, inflation has been uncomfortably high.

Price pressures have severely affected the cost of food, energy and real estate that Powell called fundamentals of life on Wednesday, making inflation by far the number one economic problem facing voters .

The Fed chairman also expressed doubts about the central bank's ability to achieve a soft landing, bringing inflation down to 2 percent without causing an economic collapse or causing widespread job losses. .

Powell was not abandoning a Goldilocks scenario, he said Wednesday. The arrival of more workers in the US labor market, for example a benefit to the economy now overshadowed by political discourse on immigration, has helped ease price pressures in 2023, a he noted. It could also help bring down inflation this year.

The Fed chairman remained optimistic, saying his personal forecast was that the central bank would move toward 2% this year as rental costs stopped rising as quickly. However, he did not know that the cooling would be enough to reduce rates in 2024.

We're going to have to let the data guide us on this, he said.

These Wednesday messages from the Fed all contrasted with the more optimistic forecasts it presented earlier in the year, which indicated that a soft landing was its base case.

Yet for both Biden and investors who follow the Fed's every move, Wednesday's harsh reality from the central bank could have been worse.

A series of data releases reporting higher-than-expected inflation have fueled concerns among some market participants that rates could rise. Powell allayed those concerns on Wednesday, saying a rate hike to quell rising inflation was unlikely. Stocks listed in New York initially rose, before falling later in the day.

Obviously, the threshold to raise is higher than to lower, but both are high, said Diane Swonk, chief economist at KPMG US.

The Fed isn't sure how quickly it can get inflation back to 2%, but it's confident rates will be high enough, said Steven Blitz, chief economist at TS Lombard.

And Powell was quick to point out that the Fed's stance on rates was a reflection of the strength of the U.S. economy – a subtle dose of good news for everyone watching at the White House.

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Powell acknowledged that the Fed would lag behind its counterparts across the Atlantic, such as the European Central Bank, which is expected to cut rates in June, but only because the U.S. economy is in good shape. better health than others.

The difference between the United States and other countries currently considering rate cuts is that they simply don't have the same type of growth, he said. Their inflation behaves like ours, or maybe a little better, but they don't experience the kind of growth we experience.

We actually have the luxury of having high growth and a strong labor market, very low unemployment, high job creation, and all of that, he added. And we can be patient and cautious as we approach the decision to cut rates.

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