Street Expects US Fed Reserve to Cut Interest Rate Further in Dec 18 announcement but watchful of outlook wording
There is consensus among U.S. market watchers that the Street expects the Federal Reserve to cut interest rates for a third successive month this week. However, the Street is uncertain whether the Fed authorities will continue the easing of the benchmark rates that resumed in October after 18 months, according to the Wall Street Journal. The January 20 return of Donald Trump to the White House introduces another element of uncertainty with his proposed raising of tariff barriers against foreign trade. Therefore, for many, the wording of the Fed Reserve’s outlook will be far more important this time around than the quantum of actual rate cut, which is widely believed to remain limited to 25 percentage points.
Fed Reserve chair Jerome Powell has repeatedly stressed the imperative of keeping inflation within touching distance of 2 percent even while keeping interest rates low enough to stimulate economic growth and keep unemployment in check. The Consumer Price Index (CPI), the primary inflation gauge that the Bureau of Labor Statistics (BLS) publishes, rose by 0.3 percent in November after maintaining an increase of 0.2 percent for the previous four months. The All Items price rise was recorded at an annual rate of 2.7 percent. The Fed Reserve’s balancing act has been made difficult by GDP growth figures for Q3 that showed a marked deceleration from the previous quarter. A Bureau of Economic Analysis (BEA) report last week said the GDP grew at an annual rate of 2.7 percent when compared to the previous quarter’s 3 percent.
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Powell, the Journal writes, is trying to find the right gear amid signs the labor market is less wobbly and inflation is a touch firmer than it appeared in September. He faces misgivings from some colleagues over continuing to cut and less conviction from others who strongly backed those first two moves. “One option this week would be to cut by a quarter point, then use new economic projections to strongly hint that the central bank is ready to go more slowly on the reductions,” the report says.
Arguments against further cuts
“Right now, either a cut or a hold could be justified,” the report quoted Jon Faust, who was a senior adviser to Powell from 2018 until earlier this year, as saying. What officials say about the path of the fed-funds rate is likely to be “more important than whatever they decide about the December meeting in particular.”
According to the Journal, some officials have hinted they would argue against cutting the rate this week. They are afraid of allowing the Fed’s credibility to be tainted by letting inflation reign above the target for a fourth or fifth year.
Even if officials think price growth will ease to their target, some could be less confident in that forecast due to promises by President-elect Trump to deport workers and impose tariffs when he takes office next month, the report adds. If pursued vigorously, those steps could reverse the logic that have guided officials’ inflation forecasts: falling prices of goods and a slowdown in wage growth.
Speculation euphoria in market
“If I were sitting on the committee right now as a voting member, I would dissent against a cut,” said Eric Rosengren, who served as Boston Fed president from 2007 to 2021, told the Journal.
In the backdrop of the euphoric conditions in the stock market and speculative assets such as bitcoin could provide grist for spending that keeps inflation entrenched, Dallas Fed President Lorie Logan has warned against cutting too far on what she views as a mistaken belief that a more “normal” interest rate for the economy is much lower.
Powell, meanwhile, is in the camp of officials who share Logn’s concern but don’t think the Fed is at risk of cutting too much, given how high they lifted rates over the past two years.
“We’re mindful of the risk that we go too far, too fast, but also of the risk that we don’t go far enough,” Powell said last month. “It seems like we’re right where we need to be.”
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