If, as many expected, the U.S. economy slips into recession in the second half of this year, the Federal Reserve will replace lifelines with tough love, he said.
The Fed could well put a pause on aggressive rate hikes, but it has repeatedly hinted that it is unlikely to cut rates this year, even in a mild recession, as it wants to contain a historic spike in inflation.
Financial markets and some economists have dismissed it as “nonsense.”
market We expect the Fed to cut rates by November, with a 30% chance of a rate cut in September.
“They’re not going to keep holding guns,” said Joe Lavogna, chief US economist at SMBC Group and a former top economic adviser to the Trump administration. With job losses on the rise, “we can’t just sit back and watch[jobs]decline.”
Pointing to past recessions, Mr. Lavogna said, the Fed typically turns away from fighting inflation when the economy takes a turn for the worse and tries to quickly avoid or minimize downturns, seemingly contradictory. I pointed out that it looks like. Since the 1950s, the median time lag between the last rate hike and the first rate cut is just two months, Lavogna said.
A rate cut would give the stock market and economy a boost, but there is a risk that inflation will spike again.
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How much has the Fed raised interest rates recently?
The Fed raised its key rate by a quarter of a percentage point earlier this month, capping it at 5 percentage points over 14 months, the most aggressive such policy in 40 years. Fed policymakers expect rate cuts to begin in late January at the earliest, even in the mild recession that Fed staff are forecasting this year. 9 months late. Such a tough stance in the face of widespread layoffs would be highly unusual.
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What effect does raising interest rates have on the economy?
Former top Fed economist Jonathan Miller said annual inflation remained stubbornly high, falling from a 40-year high of 9.1% in June to 4.9% in April, but the Fed He said it was different this time because it was still well above the 2% target. . Fed Chairman Jerome Powell said it was more important to keep inflation under control so it didn’t take hold in public sentiment as it did in the 1970s, rather than stave off a small recession that could be reversed by lowering rates.
Higher interest rates make it more expensive for consumers and businesses to borrow, restraining spending and encouraging businesses to keep prices steady or raise them slightly. But the Fed’s successive rate hikes are also expected to be the main cause of the recession.
Much of the Fed’s strategy is rooted not only in its actions, but also in its promise to raise rates and keep them going. Because that rhetoric can influence consumer inflation expectations. If workers believe that prices will continue to rise, they are more likely to demand higher wages, and firms may be able to offset that cost by raising prices even further.
“Our Commission expects inflation to come down. “And in that world, even if the forecast is largely correct, a rate cut would not be appropriate and we would not cut it.”
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Will the Fed cut interest rates any time soon?
Powell suggested the Fed could cut interest rates if inflation fell more rapidly, as some economists expected. The collapse of Silicon Valley Bank and two other banks could also continue to threaten local banks if more customers withdraw their deposits and the shrinking of lending accelerates. Economists say that could trigger a deepening economic slowdown and cut inflation more quickly, either of which could lead to the Fed cutting interest rates within months.
“Chairman Powell doesn’t want to talk[about a rate cut]at this point,” Ian Shepardson, chief economist at Pantheon Macroeconomics, said in a note to clients. “But that will change. The Fed will do what the data says, and the data is heading south.”
Lavogna believes the Fed will cut rates this year partly because the recession is deeper than the Fed expected. But he said the Fed would switch gears even if the unemployment rate rises to 4.5% from the current 3.4%, as expected by the Fed, and there is a mild to moderate recession.
“The Fed is usually bad at knowing when to turn policy,” Lavogna said.
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How did the Fed respond to the Great Recession?
By August 2007, the housing crisis was already underway that led to the onset of the Great Recession later that year. Many low- and middle-income homeowners defaulted on their subprime mortgages, and banks began restricting lending.
“I think the markets are likely to stabilize,” said then-Fed Chairman Ben Bernanke, who pointed to financial strains, according to a record of a closed-door Fed meeting.
But he said he “remains aware of the risks” from inflation. Inflation fell to 2.4% in July from 4.1% a year earlier, but Bernanke said the improvement could be temporary and low unemployment (4.6%) could boost wages and prices. I agree with the idea that there is a gender.
“I agree with the view that inflation risks are still tilted to the upside,” Bernanke said.
In a post-meeting statement, the Fed said there was “no convincing demonstration of a sustained easing of inflationary pressures” and kept rates on hold.
Just three days later, the Fed cut the discount rate, citing “turmoil in financial and credit markets,” Lavogna said. And the central bank cut the benchmark federal funds rate by 0.5 percentage points at its September meeting, followed by a quarter percentage point cut in October and December.
“We are concerned about pre-empting a potentially unfavorable move between the job market and the housing market,” Bernanke said at a meeting in September. “As for inflation, the slowdown we are likely to see will remove some of the upside risks we have been concerned about.”
Lavogna said the Fed’s current stance was “eerily similar,” pointing to the current problems with local banks.
But Miller says the Fed’s dilemma in 2007 was different. The 2007-2009 financial crisis did more damage as it affected the country’s largest banks, which were closely aligned with each other and severely curbed lending. Regional banks have not had much of an impact on the economy as a whole, but if the crisis escalated to more regional banks, it could hurt lending and growth even more severely, Miller said.
Inflation is now 4.9%, double the rate in 2007, making it easier for the Fed to cut rates at the time, he said.
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What happened in the recessions of 1990-1991 and 2001?
Inflation rose to 4.8% and 3.7% respectively in July 1990 and January 2001, and the Fed kept interest rates unchanged at historically high levels. However, when the economy began to become unstable due to the soaring oil prices in 1990, the dot-com crash in 2001, and the impact of high interest rates, the FRB quickly changed its policy and began lowering interest rates.
On November 15, 2000, the Fed noted that high energy prices could raise inflation expectations despite weakening household and business demand. It kept rates on hold, adding that “risks continue to focus mainly on conditions that could lead to increased inflationary pressures…”.
The Fed changed course by January 3, cutting its key policy rate by 0.5 percentage points ahead of the 20,000 job losses that month. “Further slump in sales and production and high energy prices are sapping the purchasing power of households and businesses,” the report said. Moreover, inflationary pressures remain subdued. “
“Inflation wasn’t as big of an issue then as it is now,” Miller said. “So it was an easier choice for them.”
Still, Lavogna thinks a weakening labor market, with tens of thousands of monthly job losses, could prompt the Fed to change course.
“When the economy goes bad, they’re going to be under a lot of pressure to do something about it,” he says.
