The Fed Rate Cut Is Here: Why Now Is a Make-or-Break Moment | WSJ

Summary

The 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.