The Fed must decide when and how much to cut rates this year. Several Fed officials in recent weeks have said they will move slowly. What are they thinking?
I was not old enough to experience the angst that inflation caused in the 1970's, but I watched my parents still sometime act like inflation would come back well into the this century. I suspect the Fed is anchored to the 1970's as well.
Thank you Claudia. Fear drives people and institutions to make horrendous decisions always at the expense of the less fortunate. I concur the Fed should cut interest rates which had little effect on reducing inflation (monetary policy useless; fiscal policy highly impactful injecting currency into the economy where it can produce I.e., people, services and institutions that can resource accordingly). Having the global fiat currency rocks! Hard to believe we still suffer with antiquated fear practices instead of directing fiat currency, fiscal policy, that most benefits the US, all citizens and remain the economic lifeblood for the global economy. Makes my life in geopolitics challenging. Take care.
Hubris must be avoided continually! By avoiding the hubris trap, Fed officials should better collaborate, to include an MMT LENS, with numerous policymakers. Call all your Fed contacts and see what you can offer. Thanks so much Claudia…you’re in our prayers.
Thanks for this informative analysis. The Fed's roles are planning and publicly explaining the content and timing of its actions. You do a great job of putting its institutional tendencies in an historical context.
For the record 4Q US GDP grew 3.3% and for the year grew 2.5% after just a 1.9% gain all of 2022. Big fiscal did that. Also good to see disinflation in this report ahead of the Dec PCE inflation index tomorrow. 2023 proved we didn't need a recession and yes higher rates puts a ton of stress on credit markets and has made life difficult for Americans especially with trying to buy a home on the flip side it did increase deficit spending in the economy via interest rate payments albeit towards the rich.
I'm not a Jerome Powell fan and its on him to not screw this up and not cause a recession.
Have you considered the implications the fast rate cuts would have on fiscal spending? Currently, we are getting close to a trillion of new net money into the economy via interest rates. Although, that's free welfare money for the rich, some of it may be trickling down as spending, which may be keeping the economy strong. If they lower interest rates too fast and at the same time the government doesn't increase fiscal spending in other areas, then that could lead us into a recession. On the inflation front, I understand that the higher interest rates are keeping prices high (not the other way around as Powell thinks). The main reason inflation has come down is from lower price of oil and many supply chains coming back on line. The reduction has nothing to do with Fed monetary policies. Housing is still a price issue, but that's another story about lack of supply and I don't see that changing.
I agree. The fiscal spend is more than taxing, which is a surplus for the private sector. Same as last year. Add that to the extra spend in interest for treasury holders, I suspect that's a main reason we avoided a recession. I doubt we will head towards a recession this year if business-as-usual continues with fiscal and monetary policies. If the Fed starts to lower interest rates slowly, that may provide a boost in the stock market as some people shift their savings from income to equity investments.
It's unearned income (economic rents)! The biggest financial risk to the US economy is debt deflation. When compounding interest paid on non-government sector debt exceeds the real productive capacity of the economy the inevitable result is an increase in non-government sector bankruptcies. The last thing the US economy needs is for the non-government sector to be paying a larger portion of their income servicing interest paid on debt. The more money spent paying down interest on debt the less available for spending on goods and services.
You are, of course, correct. Unfortunately, the Fed is not engaged primarily in doing what is best for the American people -- it's covering its own arse politically.
Hi Claudia. I just got here after reading your Bloomberg piece about how economists might have been using bad data. I liked you points there... they sound like something we should really keep an eye on. But here you seem to be praising that same data that you questioned in the other piece. Is there anything that maid you consider employment data fully trustworthy to be calling for cuts?
The very best we have are the official statistics. There are other reputable surveys too. It is extremely important that we bring the life experiences of people and businesses into the policymaking process. I have extensive training on these data and measurement, in general, so I work hard to ensure the highest quality of analysis. All that said, we must continue to improve the statistics, including by funding those efforts.
It strikes me that the Fed is finally aware that the Federal government continues massive fiscal stimulus and that the only check on inflation--the rate of which is still well-above the magical 2% level--is interest rate levels modestly above the "natural rate". There is no likelihood that Federal government spending will moderate anytime soon, so I hope the Fed continues to hold interest rates at current levels despite the harm they appear to be doing to the housing market.
But the question is about inflation. The Fed should have no opinion about trend growth -- to the extent that inflation steadies at 2%. Last year we saw a big disinflation and strong growth.
I wonder what the downside is (to the Fed) if they make one "token" interest cut in March and keep markets guessing about their next moves? Markets are already pricing in 6 cuts in 2024. Give them the first cut..could be a sell the news moment. Improve business conditions a tad and wait and see. Feds have more than 5% of dry powder to deploy.
In a normal presidential election year with low unemployment, and good GDP growth, and a broadening stock market, and a fed fund rate ~2pts above CPI and national interest costs projected to exceed military spending…a rate cut or 3 would be obvious.
However, the one thing voters hate, Hate HATE! more than anything else is inflation especially when it’s in their face every day at the gas station and grocery store.
With the totalitarian’s doing their dirty best to snarl the one thing the FED has no control over, supply chains, and the Fed’s fixation on the “Burn’s Decade” my guess is no cuts until 1Q25 at the soonest.
Perhaps the feed is looking at shipping costs, which appear to be rapidly increasing due to the conflict with Yemen. This is causing many ships to take much longer routes to deliver goods.
Yes, but unless the conflict spreads or really drags on the effects on inflation in US should be modest. On big difference from 2021-22 is that we don't have the surge in goods demand now. Supply chain costs and high goods demand together is what caused the high goods inflation.
You have had a very good call on prospects of soft landing. Kudos.
There is a case for cutting interest rates but your piece does not make it. The only fundamental argument you make is at the end, noting (correctly) the narrowing breadth of labor market growth.
Implicit in your piece is that prevailing monetary policy is restrictive and thus rates should be lower and policy thereby easier. But it's not obvious policy is restrictive. Rates started rising 2 years ago and transmission happened pretty rapidly. Now, yes nominal interest rates are relatively high vs past 20-ish years; yes, real interest rates however measured are relatively high vs past 20-ish years. But we no longer are in the balance sheet hangover of the GFC so rates **should** be higher than recent history. Moreover, equities are at the highs; spreads are well within historical norms and in some cases moving toward upper quartile of their historical distribution. Bank credit growth seems tight (by various metrics) but well more than half of newly originated credit now comes from mkts + private credit.
Would be great for a piece actually making the case for lower rates on fundamental grounds. Especially again as you got the big picture soft landing call of 2023.
With all due respect, come on, inflation in and of itself falling back to target is not necessarily sufficient to cut. It is a great development for the durability of the expansion and society's well being. And for the Fed, it absolutely is reason to stop tightening, which if one believes balance sheet runoff is tightening (as I do) they should cease next week so that policy is truly on hold (steady funds rate + steady balance sheet).
The pace of growth is above even the upper bound of mainstream estimates of its potential rate and there's not much in the way of forward-looking macro indicators to suggest it is about to dip below trend on a meaningful basis. Ergo, how is policy restrictive at present (esp w financial conditions observation above) and thereby needs to be adjusted via rate cuts? Put differently, what is the body of evidence to support the conclusion that r is meaningfully above r*?
Claudia, I agree with everything you state in your article, and I agree with your conclusion that the Fed should start to cut sooner.
But to ask CJ’s question a little differently, how do we model the impact of initiating rate cuts now vs May. Would it be possible to estimate how many fewer jobs will created every month that the rates are held steady? Or is it really an issue of relative risk?
And I am old enough to remember the 70’s. Not only is the situation very different, the world is very different, and, hopefully, we’ve learned a thing or two.
In the real economy it is likely not to mean much. In the credit-intensive sectors in both the real economy and credit markets (banking, CRE, etc.) it puts more at risk. The Fed costing us the soft landing (inflation back to 2% and low unemployment) is not my base case, but I see them as the most substantial risk. It does not have to be this way.
I was not old enough to experience the angst that inflation caused in the 1970's, but I watched my parents still sometime act like inflation would come back well into the this century. I suspect the Fed is anchored to the 1970's as well.
Thank you Claudia. Fear drives people and institutions to make horrendous decisions always at the expense of the less fortunate. I concur the Fed should cut interest rates which had little effect on reducing inflation (monetary policy useless; fiscal policy highly impactful injecting currency into the economy where it can produce I.e., people, services and institutions that can resource accordingly). Having the global fiat currency rocks! Hard to believe we still suffer with antiquated fear practices instead of directing fiat currency, fiscal policy, that most benefits the US, all citizens and remain the economic lifeblood for the global economy. Makes my life in geopolitics challenging. Take care.
Agree. Fed officials face a difficult task. I understand that, but I do worry about how the past and other Fed hang ups could slow them down.
Hubris must be avoided continually! By avoiding the hubris trap, Fed officials should better collaborate, to include an MMT LENS, with numerous policymakers. Call all your Fed contacts and see what you can offer. Thanks so much Claudia…you’re in our prayers.
Thanks for this informative analysis. The Fed's roles are planning and publicly explaining the content and timing of its actions. You do a great job of putting its institutional tendencies in an historical context.
For the record 4Q US GDP grew 3.3% and for the year grew 2.5% after just a 1.9% gain all of 2022. Big fiscal did that. Also good to see disinflation in this report ahead of the Dec PCE inflation index tomorrow. 2023 proved we didn't need a recession and yes higher rates puts a ton of stress on credit markets and has made life difficult for Americans especially with trying to buy a home on the flip side it did increase deficit spending in the economy via interest rate payments albeit towards the rich.
I'm not a Jerome Powell fan and its on him to not screw this up and not cause a recession.
Have you considered the implications the fast rate cuts would have on fiscal spending? Currently, we are getting close to a trillion of new net money into the economy via interest rates. Although, that's free welfare money for the rich, some of it may be trickling down as spending, which may be keeping the economy strong. If they lower interest rates too fast and at the same time the government doesn't increase fiscal spending in other areas, then that could lead us into a recession. On the inflation front, I understand that the higher interest rates are keeping prices high (not the other way around as Powell thinks). The main reason inflation has come down is from lower price of oil and many supply chains coming back on line. The reduction has nothing to do with Fed monetary policies. Housing is still a price issue, but that's another story about lack of supply and I don't see that changing.
I don't think this should be a factor in the Fed's decisions.
Fiscal policy provided huge impact as well.
I agree. The fiscal spend is more than taxing, which is a surplus for the private sector. Same as last year. Add that to the extra spend in interest for treasury holders, I suspect that's a main reason we avoided a recession. I doubt we will head towards a recession this year if business-as-usual continues with fiscal and monetary policies. If the Fed starts to lower interest rates slowly, that may provide a boost in the stock market as some people shift their savings from income to equity investments.
It's unearned income (economic rents)! The biggest financial risk to the US economy is debt deflation. When compounding interest paid on non-government sector debt exceeds the real productive capacity of the economy the inevitable result is an increase in non-government sector bankruptcies. The last thing the US economy needs is for the non-government sector to be paying a larger portion of their income servicing interest paid on debt. The more money spent paying down interest on debt the less available for spending on goods and services.
You are, of course, correct. Unfortunately, the Fed is not engaged primarily in doing what is best for the American people -- it's covering its own arse politically.
The Fed cares. I know it does, but some of its thinking is not consistent with that.
Hi Claudia. I just got here after reading your Bloomberg piece about how economists might have been using bad data. I liked you points there... they sound like something we should really keep an eye on. But here you seem to be praising that same data that you questioned in the other piece. Is there anything that maid you consider employment data fully trustworthy to be calling for cuts?
Keep on the great work!
The very best we have are the official statistics. There are other reputable surveys too. It is extremely important that we bring the life experiences of people and businesses into the policymaking process. I have extensive training on these data and measurement, in general, so I work hard to ensure the highest quality of analysis. All that said, we must continue to improve the statistics, including by funding those efforts.
It strikes me that the Fed is finally aware that the Federal government continues massive fiscal stimulus and that the only check on inflation--the rate of which is still well-above the magical 2% level--is interest rate levels modestly above the "natural rate". There is no likelihood that Federal government spending will moderate anytime soon, so I hope the Fed continues to hold interest rates at current levels despite the harm they appear to be doing to the housing market.
But the question is about inflation. The Fed should have no opinion about trend growth -- to the extent that inflation steadies at 2%. Last year we saw a big disinflation and strong growth.
I wonder what the downside is (to the Fed) if they make one "token" interest cut in March and keep markets guessing about their next moves? Markets are already pricing in 6 cuts in 2024. Give them the first cut..could be a sell the news moment. Improve business conditions a tad and wait and see. Feds have more than 5% of dry powder to deploy.
There is no rational reason to wait. But as my post argued they are likely to be irrational.
In a normal presidential election year with low unemployment, and good GDP growth, and a broadening stock market, and a fed fund rate ~2pts above CPI and national interest costs projected to exceed military spending…a rate cut or 3 would be obvious.
However, the one thing voters hate, Hate HATE! more than anything else is inflation especially when it’s in their face every day at the gas station and grocery store.
With the totalitarian’s doing their dirty best to snarl the one thing the FED has no control over, supply chains, and the Fed’s fixation on the “Burn’s Decade” my guess is no cuts until 1Q25 at the soonest.
Inflation has fallen rapidly.
Perhaps the feed is looking at shipping costs, which appear to be rapidly increasing due to the conflict with Yemen. This is causing many ships to take much longer routes to deliver goods.
Yes, but unless the conflict spreads or really drags on the effects on inflation in US should be modest. On big difference from 2021-22 is that we don't have the surge in goods demand now. Supply chain costs and high goods demand together is what caused the high goods inflation.
You have had a very good call on prospects of soft landing. Kudos.
There is a case for cutting interest rates but your piece does not make it. The only fundamental argument you make is at the end, noting (correctly) the narrowing breadth of labor market growth.
Implicit in your piece is that prevailing monetary policy is restrictive and thus rates should be lower and policy thereby easier. But it's not obvious policy is restrictive. Rates started rising 2 years ago and transmission happened pretty rapidly. Now, yes nominal interest rates are relatively high vs past 20-ish years; yes, real interest rates however measured are relatively high vs past 20-ish years. But we no longer are in the balance sheet hangover of the GFC so rates **should** be higher than recent history. Moreover, equities are at the highs; spreads are well within historical norms and in some cases moving toward upper quartile of their historical distribution. Bank credit growth seems tight (by various metrics) but well more than half of newly originated credit now comes from mkts + private credit.
Would be great for a piece actually making the case for lower rates on fundamental grounds. Especially again as you got the big picture soft landing call of 2023.
I made the case. Inflation is well on its was to 2%. It’s time to cut.
With all due respect, come on, inflation in and of itself falling back to target is not necessarily sufficient to cut. It is a great development for the durability of the expansion and society's well being. And for the Fed, it absolutely is reason to stop tightening, which if one believes balance sheet runoff is tightening (as I do) they should cease next week so that policy is truly on hold (steady funds rate + steady balance sheet).
The pace of growth is above even the upper bound of mainstream estimates of its potential rate and there's not much in the way of forward-looking macro indicators to suggest it is about to dip below trend on a meaningful basis. Ergo, how is policy restrictive at present (esp w financial conditions observation above) and thereby needs to be adjusted via rate cuts? Put differently, what is the body of evidence to support the conclusion that r is meaningfully above r*?
"come on" does not get your reply read.
More here: https://x.com/Claudia_Sahm/status/1750255228627161416?s=20
Claudia, I agree with everything you state in your article, and I agree with your conclusion that the Fed should start to cut sooner.
But to ask CJ’s question a little differently, how do we model the impact of initiating rate cuts now vs May. Would it be possible to estimate how many fewer jobs will created every month that the rates are held steady? Or is it really an issue of relative risk?
And I am old enough to remember the 70’s. Not only is the situation very different, the world is very different, and, hopefully, we’ve learned a thing or two.
In the real economy it is likely not to mean much. In the credit-intensive sectors in both the real economy and credit markets (banking, CRE, etc.) it puts more at risk. The Fed costing us the soft landing (inflation back to 2% and low unemployment) is not my base case, but I see them as the most substantial risk. It does not have to be this way.