The Fed Rate Cut Is Here: Why Now Is a Make-or-Break Moment | WSJ
Summary
TLDRThe Federal Reserve has been navigating a challenging path to combat high inflation, raising rates 11 times in 16 months and then lowering them to address unemployment concerns. With inflation now closer to the 2% target, the focus shifts to potential labor market issues. The Fed considers rate cuts to stimulate the economy and prevent a recession, but must balance the risk of renewed inflation. The decision at the September meeting to cut rates by 50 basis points reflects a more urgent approach, with significant implications for the economy's future trajectory.
Takeaways
- ⛰️ The Federal Reserve has raised its benchmark interest rate 11 times in 16 months to fight stubborn inflation, but left it unchanged for over a year before recently lowering it.
- 📉 The Fed decided to lower the federal funds rate by half a percentage point, signaling a pivotal moment as it tries to avoid a recession while managing inflation and unemployment.
- 📊 Inflation, which rose to over 7% in 2022 after the pandemic, has since cooled to around 2.5%, but concerns have shifted toward a weakening labor market.
- 👷♂️ U.S. job growth slowed, with 142,000 jobs added in August, reflecting a decline from the previous year and signaling a cooling labor market.
- 💼 Businesses are reducing their demand for workers, contributing to the rise in unemployment, and this could lead to more significant job losses if the trend continues.
- 💸 The Fed can reduce interest rates to stimulate the economy by lowering borrowing costs, making it cheaper for businesses to expand and for consumers to borrow.
- ⏳ Some Fed officials argue for maintaining higher rates to ensure inflation remains under control, while others advocate for faster rate cuts to prevent further job losses.
- 📉 The Fed raised interest rates from near-zero in 2022 to a range of 5.25% to 5.5% by mid-2023, and is now considering how fast and how far to reduce rates without triggering a recession.
- ⚖️ Two camps have emerged within the Fed: one advocating for cautious rate cuts to stabilize inflation, and another urging for more aggressive cuts to avoid a serious employment downturn.
- 🤔 The next six months will be critical for the U.S. economy, as the Fed navigates its way forward, balancing inflation control and job market stability to avoid a potential recession.
Q & A
What action did the Federal Reserve take to combat inflation?
-The Federal Reserve raised its benchmark interest rate 11 times in 16 months and then left it unchanged for over a year. Eventually, they decided to lower the target range for the Federal funds rate by a half percentage point.
Why is the Federal Reserve aiming to keep inflation around 2%?
-The Central Bank likes to keep inflation around 2% as a target to maintain price stability and economic health.
What was the peak inflation rate in 2022 according to the script?
-Inflation rates surpassed 7% in 2022.
What was the Federal Reserve's initial approach to controlling inflation?
-The Federal Reserve initially thought that the economy would have to slow down significantly to control inflation, which led to raising interest rates.
How did the economy perform in terms of inflation by July according to the script?
-By July, the Federal Reserve managed to bring inflation closer to 2.5%.
What economic indicators are causing concern in the labor market?
-The US economy added 142,000 jobs in August, showing a slight rebound from the summer's slump but a notable decline from a year ago, indicating a cooling labor market.
What is the Federal Reserve's strategy to avoid further erosion in the labor market?
-The Federal Reserve can cut the Federal funds rate, which can lead to reduced rates on loans and lower borrowing costs for consumers, potentially incentivizing businesses to invest in expansion and hiring.
What were the two different approaches discussed by the Federal Reserve regarding interest rate cuts?
-One approach is to trend inflation towards two sustainably, while the other argues for more aggressive rate cuts to preempt a serious decline in employment.
What was the outcome of the Federal Reserve's September meeting mentioned in the script?
-The Federal Reserve announced at its September meeting that it would cut rates by 50 basis points, indicating a faster path down from the high interest rates.
What risks are associated with cutting interest rates too fast according to the script?
-The risk of cutting interest rates too fast is that if some new shock hits the economy, inflation could kick back up, which would be destabilizing and require the Federal Reserve to start raising rates again.
What is the significance of the next six months for the economy and Federal Reserve according to the script?
-The next six months could be pivotal in determining whether the economy is just going through a soft patch or falling into a recession, and how well the Federal Reserve can manage the economic transition.
Outlines
📉 Economic Balancing Act
The Federal Reserve has been actively managing interest rates to combat inflation, which had risen significantly post-pandemic, surpassing 7% in 2022. After raising rates 11 times in 16 months, they've recently decided to lower the target range for the Federal funds rate by half a percentage point. This move comes amidst a backdrop of slowing inflation and rising unemployment, which has led to fears of a potential recession. The Fed's challenge is to manage these competing economic factors without causing a downturn. They aim to keep inflation around 2%, and by July 2023, they had brought it closer to 2.5%. The script also discusses the potential impacts of rate cuts on consumer borrowing costs and business investment, as well as the differing opinions among Fed officials on the appropriate pace of rate reductions.
🔍 Future Economic Outlook
The Federal Reserve's decision to cut interest rates by 50 basis points reflects a more urgent approach to managing inflation and employment. The question of whether further cuts will be made in the coming months, particularly in November and December, is a critical one for the economy. The next six months are seen as crucial in determining whether the economy is experiencing a temporary soft patch or is on the verge of a recession. The narrative suggests that if Fed Chairman Powell can successfully navigate this period, it could solidify his legacy as a successful central banker. The script ends on a contemplative note, pondering the future trajectory of the economy and the role of the Fed's actions in shaping it.
Mindmap
Keywords
💡Federal Reserve
💡Inflation
💡Interest Rate
💡Benchmark Interest Rate
💡Unemployment
💡Recession
💡Federal Funds Rate
💡Economic Stability
💡Monetary Policy
💡Labor Market
💡Rate Cut
Highlights
The Federal Reserve has been aggressively combating inflation by raising its benchmark interest rate 11 times in 16 months.
The Fed left the interest rate unchanged for over a year before deciding to lower the target range.
The current moment is critical for the Fed as it navigates inflation and unemployment.
Inflation rates had surpassed 7% in 2022, significantly above the Fed's target of around 2%.
The economy has performed better than expected despite the Fed's rate hikes.
By July, the Fed had successfully brought inflation closer to 2.5%.
Economists are now concerned about signs of a slowing labor market.
The US economy added fewer jobs in August compared to a year ago, indicating a cooling labor market.
The Fed considers cutting the Federal funds rate to stimulate the economy and reduce unemployment.
Rate cuts can lead to lower borrowing costs for consumers and businesses.
The Fed has two reasons for cutting interest rates: to stimulate the economy or because rates were too high.
The Fed hiked rates to between 5.25% and 5.5% by July 2023.
There is uncertainty about how far and how fast the Fed will reduce rates.
Fed officials have differing views on the pace of rate cuts, with some advocating for a more cautious approach.
Others argue for more aggressive rate cuts to prevent a serious decline in employment.
The Fed announced a 50 basis points rate cut in September, indicating a faster path to lower rates.
The decision to cut rates reflects the Fed's commitment to not fall behind in managing the economy.
The next six months will be crucial in determining whether the economy is experiencing a soft patch or falling into a recession.
Transcripts
- [Narrator] The Federal Reserve
has been climbing a mountain to combat stubborn inflation,
so fast that it raised its benchmark interest rate
11 times in 16 months,
then left it unchanged for more than a year, but now...
- The committee decided to lower the target range
for the Federal funds rate by a half percentage point.
- Now is a make-or-break moment for the Fed.
- [Narrator] While prices have cooled,
an uptick in unemployment has reignited warnings of...
- A recession. - A recession.
- A recession. - And so the question now is:
Can they stick the landing?
- [Narrator] The Central Bank
likes to keep inflation around 2%.
That became a problem in the aftermath of the pandemic.
Prices grew well above the 2% mark,
eventually surpassing 7% in 2022.
- [Nick] For the last two years,
inflation was the big emergency
that was occupying all of the Fed's attention.
When the Fed was raising interest rates,
they thought the economy
was gonna have to slow down a lot more than it has.
- I wish there were a completely painless way
to restore price stability.
There isn't, and this is the best we can do.
- And what's happened is the economy's done pretty well
and inflation's come down anyway.
- [Narrator] By July,
the Fed managed to bring inflation closer to 2.5%.
And with prices easing,
economists have turned their attention
toward troubling signs in the labor market.
The US economy added 142,000 jobs in August,
a slight rebound from the summer's slump in hiring,
but a notable decline from a year ago.
- The cooling in labor market conditions is unmistakable.
- It's harder to stop a rise in the unemployment rate
once demand for workers has cooled.
I mean, what you're seeing right now is businesses saying,
"We just don't need workers
the way we did a couple of years ago."
- [Narrator] The Fed can try to avoid further erosion
by cutting the Federal funds rate
or the rate that commercial banks pay
when they borrow from each other.
Those cuts, in turn, can lead to reduced rates on loans,
meaning lower borrowing costs for consumers
in the form of mortgages, car loans, and credit cards.
They can also create an incentive for businesses
to invest in expansion and hiring.
- The Fed can cut interest rates for two reasons.
One would be you're actually trying
to stimulate the economy.
You could also cut interest rates,
including in the current situation,
just because they don't need to be as high as they've been.
You don't need to slow down the economy
as much as you had over the past year or two
when inflation was much higher.
- [Narrator] Back to the mountain
that the Fed spent the last two years climbing,
starting from historically low interest rates near zero
in early 2022,
the Central Bank eventually hiked
to rates between 5.25% and 5.5% by July 2023,
and stayed there.
- Now they're coming down the mountain,
but nobody really knows where base camp is gonna be.
How far down are you going to go
and how fast should you get there?
- Fed officials largely agreed on the path forward
since June 2022,
but in recent months,
two routes down to base camp have emerged.
- Earlier this year, you heard a lot of people saying,
"Look, this economy's doing all right.
The economy's adding jobs.
The unemployment rate is at a historically low level.
Why rush this?"
You have a Fed governor, Miki Bowman,
the Kansas City Fed President, Jeff Schmid, saying...
- I still believe quite strongly
that we really need to trend this inflation number
towards two.
It has to be sustainable.
- The danger is that if the labor market
starts to weaken a little bit more,
it could weaken a lot more,
and then you're having to cut more aggressively.
- [Narrator] The other camp argues more aggressive rate cuts
could preempt a serious decline in employment.
- Now that you have the labor market slowing down,
these people are saying, "Let's get ahead of this.
Let's not have a recession
that isn't necessary to finish the job on inflation."
There've been a number of Fed officials,
the Fed governor, Adriana Kugler,
with the Chicago Fed President, Austin Gouldsby,
who have been more insistent in saying...
- We've got to keep our eye
on the employment side of the mandate now.
This is what the path down to 2% inflation looks like.
- The danger, of course, of going too fast is:
Well, what if some new shock hits the economy
and inflation kicks back up?
That would be very destabilizing
to have interest rates go back up for the Fed to say,
"Whoops, we cut too much.
We need to start climbing this mountain again."
- [Narrator] The Fed announced at its September meeting
that it would cut rates by 50 basis points,
starting on a faster path down the mountain.
- We thought about what to do,
and we concluded that this was the right thing
for the economy, for the people that we serve,
and that's how we made our decision.
- A 50-basis point interest rate cut
signals more urgency here.
They raised rates a lot
and they raised rates in large increments on the way up,
and so now that inflation seems like it's under control,
but there are more risks
of a bigger slowdown in the job market than they want,
they're gonna take back some of those interest rate cuts
more rapidly, too.
- But I think you can take this as a sign
of our commitment not to get behind.
- And so there'll be big questions now around:
Well, do you expect to do this again in November,
and in December, and early next year?
How fast do you think you're gonna take back
the interest rate increases that you made in '22 and '23?
- [Narrator] As the Fed charts its way forward,
a lot remains at stake for the economy and Powell
in the months ahead.
- And it would put Powell
on the Mount Rushmore of Central Bankers
if he can stick the landing.
Is the economy just going through a soft patch,
or is it falling into the recession
that has been long predicted by many economists?
The next six months could be pivotal
to determining which of those we're seeing unfold here.
(pensive music)
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