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Summary

In this interview, economist Malali Nikor discusses the recent U.S. Federal Reserve rate cuts and their potential impact on the economy. She explains that inflation and unemployment data suggest another large rate cut could happen in November 2024, following the September cut. Nikor emphasizes that while some advocate for a more moderate approach, current labor market trends and rising house prices may force further action. She also touches on the upcoming U.S. elections, noting that the Fed’s monetary policies remain independent of political timelines.

Takeaways

• 💼 The US payroll data is key to determining if another large rate cut by the Federal Reserve will occur in November.
• 📉 Inflation in the US is targeted at around 2%, and recent data showed inflation at approximately 2.3%, which led to a deep rate cut in September.
• 💡 The FED justified the September rate cut based on personal consumption expenditure, which only increased by 1.8% in August 2024, signaling lower inflationary pressure.
• 📊 Unemployment in August 2024 was 4.2% and is projected to rise to 4.4% by the end of 2024, further driving calls for another rate cut to stimulate the job market.
• 💬 Economist Michelle Bowman advocated for a smaller 25% rate cut in September, emphasizing concerns over rising house prices and rent, which affect inflation differently than consumer goods.
• 🏠 Housing inflation remains a significant concern, with rising mortgage and rent costs weighing heavily on the consumer spending basket.
• 📅 The FED’s future actions, including any potential rate cuts in November, may depend on election outcomes, especially given Kamala Harris' focus on affordable housing.
• 🔄 The FED aims to balance stimulating the economy and preventing a rise in unemployment, which could lead to more rate cuts based on job data from September and October.
• 💰 The FED's actions are seen as independent, not tied to election cycles, but rather based on the economic health of the US.
• 📆 Fiscal policy changes to support the economy are expected to take effect by Q1 2025, so until then, the FED's monetary policy will be the primary tool for economic stabilization.

Q & A

What is the core question surrounding the speculation about the upcoming Federal Reserve meeting in November?

The core question is whether the US payrolls data will support another jumbo-sized rate cut by the Federal Reserve.

What is the Federal Reserve's inflation target, and how does the current rate compare to it?

The Federal Reserve's inflation target is around 2%, and the current inflation rate is approximately 2.3%, slightly above the target.

Why did the Federal Reserve implement a rate cut of 5% in September 2024?

The Federal Reserve implemented a 5% rate cut in September 2024 based on two major statistics: personal consumption expenditure, which showed only a 1.8% increase, and unemployment data, which came in at 4.2% in August 2024, projected to rise to 4.4% by the end of the year.

What are economists now calling for based on the unemployment data?

Economists are calling for the Federal Reserve to implement another rate cut, as unemployment is now considered a bigger problem than inflation.

What is Michelle Bowman's view on the rate cuts?

Michelle Bowman advocated for a more muted 25% rate cut, instead of the deep 5% cut in September, and continues to express concerns over rising house prices, which are higher than personal consumption expenditure.

How do housing prices affect the Federal Reserve's decisions on rate cuts?

Housing prices, particularly mortgage and rent costs, make up a large portion of consumer spending, and the inflation in house prices is much higher than personal consumption expenditure. This complicates decisions on rate cuts as high housing costs can counterbalance lower inflation in other areas.

Is another deep rate cut likely in November?

Another deep rate cut is possible but depends on the jobs data and housing prices. If unemployment continues to rise, another large cut may occur; however, some economists expect a more muted rate cut.

What impact could the November elections have on the Federal Reserve's rate decisions?

The November elections could influence the Federal Reserve's rate decisions, particularly if affordable housing becomes a key issue. However, the Fed maintains that its decisions are based on economic data, not election cycles.

Will fiscal policy play a role in the US economy's recovery in the short term?

Fiscal policy is not expected to play a significant role in the short term due to the upcoming elections and a potential change in government. Fiscal support is projected to start impacting the economy in early 2025, so the Federal Reserve's monetary policy will be the primary tool for stimulating the economy in the next six months.

How does the Federal Reserve maintain its independence from political influence?

The Federal Reserve maintains its independence by making rate cut decisions based on economic data rather than political cycles or directives from the government, which is different from how some other economies operate.