The Forces Pulling the Fed in Two Different Directions (Analysis)

Rexa Ginux

The Forces Pulling the Fed in Two Different Directions (Analysis)

The Fed is going to leave rates unchanged this afternoon, this much we know. Anything else would shock markets and make little sense. The question is how much do Fed Chair Jay Powell and the Federal Open Market Committee (FOMC) lean into a message that the first in a series of expected rate cuts could come as soon as the next meeting in March. 

On one side, Powell has Wall Street, along with President Joe Biden and dovish Democrats, eager to see the Fed switch into rate-cutting mode. That would goose already very high stock prices and allow the economy to run a little hotter as the 2024 vote approaches even if it risks some inflation later on.

On the other side, Powell has more hawkish Federal Reserve members, many Republicans and conservative economists eager to see annual inflation actually get back to the Fed’s 2 percent annualized target before any cuts are made. 

For some Republicans, including low-rate-loving former President Donald Trump, the hawkish case is (like that of the Dems) based more on politics than economics. They’d rather see a slowing economy and rising joblessness later this year to better make the case for change. 

The truth is even non-political economists are having a rough time processing all the incoming data and deciding what it means. Some data suggest inflation (especially in wages) remains elevated and could pop higher. 

Reports on consumer spending, confidence and job openings also indicate the economy is not close to needing further central bank support. But other indicators – a clear slowing in the pace of hiring and layoffs at places like UPS, for example – suggest the lag effect of 11 interest rate hikes is now pulling down the economy.

For now, most Fed watchers expect Powell and his colleagues to try landing their message somewhere smack in the middle of all this, perhaps nudging closer to Wall Street’s expectations of multiple cuts starting in March while not fully endorsing that idea.

Key point: The Fed is coming off a brutal stretch in late 2021 and early 2022 when it badly whiffed by dismissing the post-Covid surge in inflation as “transitory.” The last thing Powell wants to do is leave the job of inflation fighting unfinished. And Powell, a registered Republican but not a favorite of Trump’s, has limited interest in how the Fed’s actions affect the 2024 election. His eye is on history. 
 

SOURCE

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