Jay Powell sends mixed interest rate signal to borrowers — and Joe Biden
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Federal Reserve officials had bad news for Joe Biden and would-be homeowners on Wednesday — borrowing costs would not fall as soon, or as far, this year as even the central bank itself had expected in the spring.
At least that was the news, revealed on Wednesday afternoon in Washington, in the Federal Open Market Committee’s so-called dot plot, a visual display of officials’ expectations for interest rates. It was something of a surprise too.
Hours earlier, a fall in the consumer price index inflation report for May had sparked a stock market rally, as investors priced in two quarter-point cuts by year-end and put the odds on the first coming in mid-September — before the US election — at more than 80 per cent.
The dot plot said no. Price pressures remained a problem, Fed officials indicated, and the central bank would cut by just a single quarter-point this year.
Worse still — for president Biden and for borrowers — Fed officials raised their inflation forecasts, as they held rates at a 23-year high of 5.25-5.5 per cent.
If it all holds true, it means that even as other central banks around the world begin trimming rates, the Fed’s first cut may still be almost six months away — after November’s presidential election.
It is a delay that could prove consequential for Biden as he battles low approval ratings for his handling of the economy.
“By having put just one quarter point cut as the appropriate action, a move in December is perfectly understandable,” said Vincent Reinhart, chief economist at Dreyfus and Mellon, and a former FOMC official. “If you’re awaiting greater confidence in disinflation, then why wouldn’t you wait until your last meeting, when you have all the data that you’re going to get for 2024?”
Yet others are less convinced. The dot plots, like market bets, have changed in recent months too — in March, officials’ forecasts were for three cuts this year. And even after Wednesday’s meeting, traders continued to price in a 64 per cent chance that the Fed would cut in mid-September.
Fed chair Jay Powell also seemed at pains in the news conference after Wednesday’s meeting to leave things more open than the dot plot suggested, saying officials’ predictions were “a very close call”.
“Fifteen of the 19 [projections] are clustered around one or two [cuts]. I would look at all of them as plausible,” he said. No one “brings to this or takes away from it a really strong commitment to a particular rate path”, he added.
Some Fed-watchers detected dissonance within the central bank’s ranks.
Krishna Guha, vice-chair at Evercore ISI, said he believed that many of the Fed’s most influential rate-setters, Powell included, were likely to have supported two cuts.
“It’s a 1.5 cut signal,” he said — leaving the decision in September, the Fed’s last meeting before the election, in play.
Powell also downplayed rate-setters’ upwards revision to their forecast for core inflation this year, from 2.6 per cent to 2.8 per cent, saying it reflected “a slight element of conservatism”.
“Do we have a high confidence that that’s right? No, it’s just a kind of conservative way for forecasting things. If we were to get more readings like today’s reading, then of course that wouldn’t be the case,” he said, referring to the softer CPI reading for May.
More “welcome” inflation data like the May CPI numbers, or signs that high borrowing costs were softening the US jobs market, could bring more cuts than the dot plots suggested on Wednesday.
Powell also picked out housing as a segment of the inflation picture the Fed would be watching, sensitive to signs that high rates were causing too much pain.
Alongside credit card debt, high mortgage rates have been especially troublesome for younger Americans trying to get on the housing ladder — and according to polls a major source of dissatisfaction.
While the White House has been reluctant to undermine the Fed’s independence and publicly call for cuts, Democratic senators Elizabeth Warren and Jacky Rosen said on Monday that high borrowing rates were driving up housing costs.
The “best thing we can do for the housing market is to bring inflation down, so that we can bring rates down”, Powell said.
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The resilience of the US economy will continue to complicate that task.
Next month will mark a year since the Fed raised rates to their 23-year high range, following 500 basis points worth of increases to stem the worst bout of inflation for a generation.
It has had far less impact on the economy than some feared, and it is still not clear that inflation will keep falling or unemployment rise enough to accelerate the Fed’s rate cut schedule, or satisfy Biden’s hopes for a reduction in borrowing costs in time for the election.
On Wednesday, Powell was eager to let the data decide — leaving September open for cuts.
“I do think [the Fed] will be deliberating a lot about whether they’re looking political. But it will be at the margins,” said Blerina Uruçi, chief US economist at T Rowe Price. “If it’s very clear that [a rate cut] is what the economy needs, I don’t think they’re going to worry about the elections.”
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