The Fed is fully expected to cut on September 18th, according to remarks made by Fed Chairman Jerome Powell at the last FOMC meeting. The only uncertainty is whether they will cut 25 or 50 basis points off of the Fed Funds rate. We forecasted that the Fed has not beaten inflation in our last post, but there has been downward pressure on overall inflation. So what does the Fed fear and why?
In the Feds opinion, inflation is in the process of declining to below 2%. The current inflation rate measured by the Consumer Price Index is 2.5% in August 2024 and trending downward. But, the Fed doesn’t use CPI, but rather PCE index. The current PCE has fallen to a current 2.5% in July 2024 as well, which was much higher a year ago. Thus, the inflation figures definitely have been declining. Will this continue? The Fed is forecasting continuing declines with the Core Goods being deflationary the past few months too. Core Good Inflation has been negative or flat the past eight of the 12 months. To the contract, Housing Services is still very high at a current 5% but is trending downwards as well. Further PCE excluding Energy and Housing has declined from 5.2% in October 2022 to the current 3%. Wage growth is still very high at approximately 3.5%, which is above the pre-Pandemic levels in 2019 at 2.5%. But the labor market has been cooling off.
So, why is the Fed going to cut interest rates? Seems like inflation is under-control and the labor market is cooling, but is not a major problem. But, Monetary Policy is very tight. Fed Fund Rates are twice the level of inflation and as high as pre-Great Recession Levels. The Fed is fearing high interest rates will start to take a toll on growth and employment, as these signs are starting to emerge. That is the Fear of the Fed – that their monetary policies were too tight and they have not adjusted in time.
