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  • Sharp disagreements over economy threaten Federal Reserve interest rate cut

    WASHINGTON (AP) — What was once seen as a near-certain cut in interest rates next month now looks more like a coin flip as Federal Reserve officials sharply disagree over the economy’s health and whether stubborn inflation or weak hiring represent a bigger threat.

    In several speeches in the past week, some policymakers have registered greater concern over persistent inflation in an echo of the “affordability” concerns that played a large role in elections earlier this month.

    At the same time, another camp is much more concerned about meager hiring and the threat that the “low-hire, low-fire“ job market could worsen into one where layoffs become more widespread.

    The turmoil on the Fed’s 19-member interest-rate setting committee reflects a deeply uncertain economic outlook brought about by multiple factors, including tariffs, artificial intelligence, and changes in immigration and tax policies.

    “It’s reflective of a ton of uncertainty,” said Luke Tilley, chief economist at M&T Bank. “It’s not surprising at all that there’s a wide divergence of opinions.”

    Fewer rate cuts by the Fed could leave borrowing costs for homes and cars elevated. More expensive mortgages and auto loans contribute to the widespread view, according to polls, that the cost of living is too high.

    Some Fed watchers say that an unusually high number of dissents are possible at the December 9-10 meeting, regardless of whether the central bank reduces rates or not. Krishna Guha, an analyst at Evercore ISI, said a decision to cut could lead to as many as four or five dissents, while a decision to keep rates unchanged could produce three.

    Four dissenting votes would be highly unusual, given the Fed’s history of seeking consensus. The last time four officials dissented was in 1992, under then-Chair Alan Greenspan.

    Fed governor Christopher Waller on Monday noted that critics of the Fed often accuse it of “group think,” since many of its decisions are made unanimously.

    “People who are accusing us of this, get ready,” Waller said Monday in remarks in London. “You might see the least group think you’ve seen … in a long time.”

    The differences have been exacerbated by the government shutdown’s interruption of economic data, a particular challenge for a Fed that Chair Jerome Powell has often described as “data dependent.” The government’s last jobs report was for August, and inflation for September.

    September jobs data will finally be published Thursday, and are expected to show a small gain of 50,000 jobs that month and an unchanged unemployment rate at a still-low 4.3%.

    For now, Wall Street investors put the odds of a December rate cut at 50-50, according to CME Fedwatch, down sharply from nearly 94% a month ago. The decline has contributed to the stock market’s drops this week.

    After cutting their key rate in September for the first time this year, Fed policymakers signaled they expected to cut twice more, in October and December.

    But after implementing a second reduction Oct. 29, Powell poured cold water on the prospects of another cut, describing it as “not a foregone conclusion — far from it.”

    And speeches last week by a raft of regional Fed officials pushed the market odds of a December cut even lower. Susan Collins, president of the Federal Reserve Bank of Boston, said, “in all of my conversations with contacts across New England, I hear concerns about elevated prices.”

    Collins said that keeping the Fed’s key rate at its current level of about 3.9% would help bring inflation down. The economy “has been holding up quite well” even with interest rates where they are, she added.

    Several other regional presidents voiced similar concerns, including Raphael Bostic of the Atlanta Fed, Alberto Musalem of the St. Louis Fed, and Jeffrey Schmid at the Kansas City Fed. Musalem, Collins, and Schmid are among the 12 officials who vote on policy this year. Schmid dissented in October in favor of keeping rates unchanged.

    “When I talk to contacts in my district, I hear continued concern over the pace of price increases,” Schmid said Friday. “Some of this has to do with the effect of tariffs on input prices, but it is not just tariffs — or even primarily tariffs — that has people worried. I hear concerns about rising health care costs and insurance premiums, and I hear a lot about electricity.”

    On Monday, however, Waller argued that sluggish hiring is a bigger concern, and renewed his call for a rate cut next month.

    “The labor market is still weak and near stall speed,” he said. “Inflation through September continued to show relatively small effects from tariffs and support the hypothesis that tariffs … are not a persistent source of inflation.”

    Waller also dismissed the concern — voiced by Schmid and others — that the Fed should keep rates elevated because inflation has topped the Fed’s 2% target for five years. So far that hasn’t led the public to worry that inflation will stay elevated for an extended period, Waller noted.

    “You can’t just sort of say it’s been above target for five years, so I’m not going to cut,” he added. “You got to give us better answers than that.”

    There could be consensus for an interest rate cut if, say, new data for October and November show the economy shedding jobs, according to Esther George, the former president of the Kansas City Fed.

    It’s also worth noting that many economists had expected multiple dissents in September, but instead only Stephen Miran, a governor appointed that month by President Donald Trump, voted against the rate cut decision, in favor of an even bigger reduction.

    “Registering a dissent is a hard decision, and I think you’re going to find people that are speaking today that wouldn’t follow through with a vote in that direction,” she said. “I think you’re going to find enough consensus, whichever way they go.”

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  • Investors brace for the Fed to dial back its 2024 rate cut predictions

    Investors brace for the Fed to dial back its 2024 rate cut predictions

    Investors are on edge this week as Federal Reserve officials prepare to signal how many interest rate cuts are still likely in 2024.

    Most market watchers believe policymakers will dial their expectations back. The question is by how much.

    The new projection on Wednesday will come in the form of a so-called “dot plot,” a chart updated quarterly that shows the prediction of each Fed official about the direction of the federal funds rate.

    In March, the dot plot revealed a consensus among Fed officials for three cuts. Now that projection is in question following a string of sticky inflation readings, cautious commentary from Fed officials and a US labor market that added more jobs than expected in May.

    Most investors now expect little more than just one cut for 2024.

    “I think the policy path will change a bit,” said former Kansas City Fed president Esther George, who predicts the median among 19 policymakers could drop to one cut even as a healthy number of officials still argue for two.

    “My expectation is the dots will show and confirm what I think the market has picked up, and that is fewer rate cuts with the inflation forecast holding.”

    FILE PHOTO: U.S. Federal Reserve Chair Jerome Powell responds to a question from David Rubenstein (not pictured) during an on-stage discussion at a meeting of the Economic Club of Washington, at the Renaissance Hotel in Washington, D.C., U.S, February 7, 2023. REUTERS/Amanda Andrade-Rhoades/File Photo

    Federal Reserve Chair Jerome Powell. REUTERS/Amanda Andrade-Rhoades (REUTERS / Reuters)

    Fed Chair Jay Powell and his colleagues on the Federal Open Market Committee have been emphasizing they want to be sure inflation is moving “sustainably” down to their 2% target before starting cuts, and that in the interim they expect to hold rates higher for longer.

    That stance isn’t expected to change this week. Officials are widely expected to hold the Fed’s benchmark rate steady on Wednesday, leaving it at a 23-year high.

    Policymakers are expected to stay cautious because the latest readings on inflation and the economy offer a mixed picture.

    The labor market added 272,000 nonfarm payroll jobs in May, significantly more additions than the 180,000 expected by economists, but the unemployment rate rose to 4% from 3.9%.

    Prices aren’t accelerating as much as they were during the first quarter, but recent readings also don’t show enough progress for the Fed to start cutting.

    The year-over-year increase in the Fed’s preferred inflation gauge — the “core” Personal Consumption Expenditures index — was 2.8% in April, unchanged from March.

    Another complication is that wages are showing resilience, as well. Wage growth was stronger than expected in May, clocking in at 4.1%.

    Fed officials will get a fresh reading from another inflation gauge, the Consumer Price Index (CPI), just hours before concluding their policy meeting this Wednesday. It is expected to show continued moderation during May after an encouraging April.

    The year-over-year change in so-called “core” CPI — which excludes volatile food and energy prices the Fed can’t control — is expected to edge down a tenth of a percent to 3.5%, compared with 3.6% in April and 3.8% in March.

    A 3.5% print on CPI may not be enough to inspire confidence at the Fed, according to George.

    “I think it’s just going to take them quite a bit longer to figure out what the trend is,” George said.

    Powell has made clear that he thinks the Fed will need more than a quarter’s worth of data to make a judgment on whether inflation is steadily falling toward the central bank’s goal of 2%.

    The September meeting is viewed by many as an optimistic case for cutting rates since the three inflation reports due out between now and then would all need to show improvement for the central bank to pull the trigger.

    In the meantime, investors expectations for the number of rate cuts this year have swung wildly.

    Odds for a first cut in September fell to roughly 52% following the hotter-than-expected jobs report released Friday, and wagers for a second rate cut dwindled to little more than a 38% chance in December.

    NEW YORK, NEW YORK - AUGUST 25: Federal Reserve Chairman Jerome Powell’s speech is seen on a television screen as traders work on the New York Stock Exchange floor during morning trading on August 25, 2023 in New York City. Stocks opened higher as Wall Street prepared for Federal Reserve Chairman Powell’s speech at the Jackson Hole Economic Symposium.  (Photo by Michael M. Santiago/Getty Images)NEW YORK, NEW YORK - AUGUST 25: Federal Reserve Chairman Jerome Powell’s speech is seen on a television screen as traders work on the New York Stock Exchange floor during morning trading on August 25, 2023 in New York City. Stocks opened higher as Wall Street prepared for Federal Reserve Chairman Powell’s speech at the Jackson Hole Economic Symposium.  (Photo by Michael M. Santiago/Getty Images)

    Traders will be listening for any clues on the Fed’s interest rate path this Wednesday as Fed chair Jay Powell speaks. (Photo by Michael M. Santiago/Getty Images) (Michael M. Santiago via Getty Images)

    Luke Tilley, chief economist for Wilmington Trust, is more optimistic. He expects the central bank will have enough data to change its tune by its policy meeting on July 31.

    The inflation data in the first month of the second quarter has helped calm fears about hotter readings in the first quarter, he said, and the CPI data out Wednesday will offer further reassurance.

    “By the time July 31st comes around, they’ll have three more months of inflation data,” Tilley said. “I think they’ll be back on the front of their feet and off their heels and ready to cut. But it really comes down to how that data comes out.”

    Wednesday will also bring other new Fed projections for investors to digest this week, as policymakers will also offer fresh forecasts for inflation, the economy and unemployment.

    And there will be the usual high level of scrutiny on whatever Powell has to say at his regular press conference following the meeting.

    Wilmer Stith, bond portfolio manager for Wilmington Trust, is looking to see whether Powell takes a more hawkish tone.

    “Is he going to be like a [Minneapolis Fed President Neel] Kashkari and other members who say we need to be higher for longer?” says Stith.

    “It’s hard to say because if we continue to get the economic growth and the labor market strength that we’ve seen, I don’t even know why they’d want to do one cut.”

    Stith said he thinks officials will pencil in two rate cuts. If the Fed only marks down just one, that could add some volatility to markets, he added, even though that is currently what investors expect.

    There is a risk the Fed could become too patient in its quest to be sure inflation is dropping, George said. Holding rates this high for too long could also sow the seeds of a recession.

    “That’s the risk they’re running here, is to say ‘time is on our side,’” she said.

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