Tag: Government regulations

WASHINGTON — Across the United States, many people are eagerly anticipating the Federal Reserve’s first cut to its benchmark interest rate this year: Prospective home buyers hope for lower mortgage rates. Wall Street traders envision higher stock prices. Consumers are looking for a break on credit card debt at record-high interest rates.

Not to mention President Joe Biden, whose re-election campaign would likely benefit from an economic jolt stemming from lower borrowing rates.

Yet Chair Jerome Powell and his fellow Fed officials are expected to play it safe when they meet his week, keeping their rate unchanged for a fifth straight time and signaling that they still need further evidence that inflation is returning sustainably to their 2% target.

The Fed’s cautious approach illustrates what’s unusual about this round of potential rate cuts. Vincent Reinhart, chief economist at Dreyfus-Mellon and a former Fed economist, notes that the Fed typically cuts rates quickly as the economy deteriorates in an often-futile effort to prevent a recession.

But this time, the economy is still healthy. The Fed is considering rate cuts only because inflation has steadily fallen from a peak of 9.1% in June 2022. As a result, it is approaching rate cuts the way it usually does rate hikes: Slowly and methodically, while trying to divine the economy’s direction from often-conflicting data.

“The Fed is driving events, not events driving the Fed,” Reinhart said. “That’s why this task is different than others.”

The central bank’s policymakers had said after their last meeting in January that they needed “greater confidence” that inflation was cooling decisively toward their 2% target. Since then, the government has issued two inflation reports that showed the pace of price increases remaining sticky-high.

In most respects, the U.S. economy remains remarkably heathy. Employers keep hiring, unemployment remains low, and the stock market is hovering near record highs. Yet average prices remain much higher than they were before the pandemic — a source of unhappiness for many Americans for which Republicans have sought to pin blame on Biden.

Excluding volatile food and energy costs, so-called “core” prices rose at a monthly pace of 0.4% in both January and February, a pace far higher than is consistent with the Fed’s inflation target. Compared with a year earlier, core prices rose 3.8% in February. Core prices are considered a signal of where inflation is likely headed.

But in February, a measure of housing costs slowed, a notable trend because housing is among the “stickiest” price categories that the government tracks. At the same time, more volatile categories, such as clothing, used cars and airline tickets, drove up prices in February, and they may well reverse course in coming months.

“Nothing about those two data prints made you feel substantially better about” inflation reaching the Fed’s target soon, said Seth Carpenter, chief global economist at Morgan Stanley and also a former Fed economist. “But it’s not at all enough to make you change your view on the fundamental direction of travel” for inflation.

Indeed, several Fed officials have said in recent speeches that they expect inflation to keep declining this year, though likely more slowly than in 2023.

The Fed has also built in some expectation that price increases would ease only gradually this year. In December, it projected that core inflation would reach 2.4% by the end of 2024. That’s not far from its current 2.8%, according to the Fed’s preferred measure.

On Wednesday, the Fed’s policymakers will update their quarterly economic projections, which are expected to repeat their December forecast for three rate cuts by the end of 2024. Still, it would take only two of the 19 Fed officials to change their forecast to one fewer rate cut for the central bank’s overall projection to downshift to just two rate cuts for 2024. Some economists expect that to happen, given that inflation has remained persistent at the start of this year.

The Fed’s benchmark rate stands at about 5.4%, the highest level in 23 years, after a series of 11 rate hikes that were intended to curb the worst inflation in four decades but have also made borrowing much more expensive for consumers and businesses.

Like the Fed, other major central banks are keeping rates high to ensure that they have a firm handle on consumer price spikes. In Europe, pressure is building to lower borrowing costs as inflation drops and economic growth has stalled, unlike in the United States. The European Central Bank’s leader hinted this month that a possible rate cut wouldn’t come until June, while the Bank of England isn’t expected to open the door to any imminent cut at its meeting Thursday.

Most economists expect the Fed to implement its first rate cut at its June meeting, which would mean that in May, the Fed would signal such a coming move. By June, the policymakers will have in hand three more inflation readings and three more jobs reports.

Sarah House, senior economist at Wells Fargo, said that timetable leaves plenty of time for inflation to resume its downward path. A rate reduction would likely lead, over time, to lower rates for mortgages, auto loans, credit cards and many business loans.

“They certainly need to see something better than the past couple of months, but they can get it,” she said.

WASHINGTON — When will the Federal Reserve start cutting interest rates this year, and by how much?

With the economy and inflation running hotter than expected, those questions will seize attention Wednesday, when Fed Chair Jerome Powell begins two days of testimony to Congress.

The financial markets are consumed with divining the timing of the Fed’s first cut to its benchmark rate, which stands at a 23-year high of about 5.4%. A rate reduction would likely lead, over time, to lower rates for mortgages, auto loans, credit cards and many business loans. Most analysts and investors expect a first rate cut in June, though May remains possible. Fed officials have projected that they will cut rates three times this year.

Powell’s semi-annual testimony — on Wednesday to the House Financial Services Committee and Thursday to the Senate Banking Committee — coincides with intensified efforts by the Biden administration to stem public frustration with inflation, which erupted three years ago and has left average prices well above where they were before. President Joe Biden’s bid for re-election will pivot in no small part on voter perceptions of his handling of inflation and the overall economy.

The administration is trying to crack down on what it calls unjustified price hikes by many large companies. Biden recently attacked “shrinkflation,” whereby a company shrinks the contents of a product rather than raise its price. The president has also sought to limit so-called “junk fees,” which in effect raise the prices that consumers pay.

Overall inflation has steadily cooled, having measured at just 2.4% in January compared with a year earlier, according to the Fed’s preferred gauge, down from a peak of 7.1% in 2022. Yet recent economic data have complicated the picture and clouded the outlook for rate cuts.

Consumer prices accelerated a bit in January, hiring has remained strong and the economy is growing at a solid pace. All of which suggests that inflation could remain persistently above the Fed’s 2% target in the coming months.

When they last met in January, the Fed’s policymakers said they wanted “greater confidence” that inflation was falling sustainably back to their target before they would feel comfortable cutting rates. Since then, several Fed officials have underscored that as long as the economy remains resilient, they can take their time deciding when to ease borrowing costs.

“The strength of the economy and the recent data we have received on inflation mean it is appropriate to be patient, careful, methodical, deliberative — pick your favorite synonym,” Christopher Waller, a key official on the Fed’s Board of Governors, said nearly two weeks ago. “They all translate to one idea: What’s the rush?”

And Philip Jefferson, the Fed’s vice chair, noted that history shows the Fed typically starts to cut rates after the economy exhibits signs of weakening. One exception occurred in 1995, when the Fed cut rates because it felt inflation was under control. That 1995 episode has been cited as a “perfect soft landing,” Jefferson noted, in which the Fed managed to tame inflation without causing a recession or a spike in unemployment.

Powell has said the Fed is aiming to achieve another soft landing, a difficult outcome that, if it succeeded, would likely win the central bank widespread praise.

But for now, the Fed chair may face tough questioning from members of Congress. Republicans are expected to caution him not to cut rates too soon or by too much. Donald Trump, the likely Republican presidential nominee, has already attacked Powell for signaling that rate cuts are probable this year.

And Democrats may push the Fed to cut rates quickly. In a letter in late January, Sen. Elizabeth Warren of Massachusetts urged Powell to cut the Fed’s key rate to help lower mortgage costs. The average rate on a 30-year mortgage has risen for four straight weeks to nearly 7%, more than double its pandemic-era low.

Some Fed officials have said they worry that a rate cut could accelerate growth too much and potentially reignite inflation. Raphael Bostic, president of the Federal Reserve Bank of Atlanta, said his conversations with business leaders have found that many of them are ready to quickly ramp up investment and hiring once the Fed reduces rates.

“If that scenario were to unfold on a large scale, it holds the potential to unleash a burst of new demand that could … create upward pressure on prices,” Bostic said.

Bostic also told reporters that he has penciled in only two rate cuts this year. And he said he thinks the Fed could pause after its first rate cut to assess its impact on the economy.

Powell might be questioned this week about the Fed’s proposed banking rules, which have spurred an intense backlash from large banks and their trade associations. According to the Fed and other regulators, the proposed regulations would require the largest banks to hold about 16% more capital — assets similar to cash — to protect against defaults. The rule was unveiled after the collapse of three large banks a year ago.

Banks have argued that the rule would force the largest financial institutions to hold up to 25% more capital, thereby reducing their ability to lend and likely forcing borrowing rates to rise.

Some civil rights organizations have joined the banks in criticizing the proposed rule, asserting that it would make it harder for Black and Latino Americans to obtain mortgages.