As the Federal Reserve is about to cut interest rates for the first time in more than four years, the market is wavering on the extent of the rate cut. Nick Timiraos, a well-known financial journalist known as the "New Federal Reserve News Agency", is one of the culprits for this situation. At that time, he said that a 25 basis point and a 50 basis point rate cut were a "close choice". On Tuesday, he wrote again that the scale of the Fed's first rate cut was in doubt. The following is an excerpt from the full text.
The Federal Reserve will cut interest rates at a two-day meeting that ends on Wednesday Eastern Time, with the goal of keeping the job market stable even as price pressures have cooled.
The decision on whether to cut the Fed’s benchmark interest rate — currently at a two-decade high of 5.25% to 5.5% — by 50 basis points or by the more traditional 25 basis points will depend on how Fed Chairman Jerome Powell leads his colleagues in a series of delicate balancing acts.
“The key question for them going into this meeting is their perception of the balance of risks,” said William English, a former senior Fed adviser. “If they are more worried about growth and employment than inflation right now, then they may well want to take a little insurance policy, which is a 50 basis point cut. The case for a 25 basis point cut is based on different considerations, including good economic fundamentals or the risk that cutting rates too quickly could spark a resurgence of inflation.”
English said a few weeks ago that he thought a smaller rate cut would be appropriate. But the recent downward trend in jobs data has made him more nervous, especially because even after two or three rate cuts, interest rates will still be relatively high.
Fed officials generally tend to raise or cut interest rates in 25 basis point steps to study the impact of these moves. However, when they believe that their interest rate stance is not well aligned with the balance of risks, they will move faster. For example, in 2022, the Fed raised interest rates by 50 basis points and 75 basis points to fight high inflation.
Shift in expectations for rate cuts
Until late last week, investors expected the Fed to cut rates by just 25 basis points this week because few officials had publicly called for a bigger cut. “Their communications were suggesting a 25 basis point cut. And the data was OK,” said Laurence Meyer, a former Fed governor.
Esther George, president of the Kansas City Fed from 2011 to 2023, said that because inflation remains above the Fed’s target and the economy “is generally in good shape, you can start with a 25 basis point cut and say, ‘We can either keep this pace of cuts for a while or if things look weaker we can go deeper.’”
Fed officials did not commit to the extent of rate cuts on the eve of the pre-meeting quiet period that began on September 7. "I have strongly advocated for early rate hikes when inflation accelerates in 2022, and I will also advocate for early rate cuts if appropriate," Fed Governor Waller said on September 6 after the latest jobs report.
In a subsequent question-and-answer session, he sounded relatively calm about the recent slowdown in job growth, saying that even if monthly job gains fall to 100,000, "that's fine" and "it's nothing to be afraid of."
Speaking the same day, New York Fed President John Williams said recent data point to "a fairly broad trend ... We are seeing continued signs of cooling. We want the economy to remain balanced."
Is it “less regrettable” to cut interest rates by 50 basis points?
Fed officials often refer to their job as risk management, for example, making sure they weigh the risk of rising inflation against the risk of accelerating unemployment. They often adjust interest rates to manage risks that appear more costly. For much of the past 2 1/2 years, as inflation surged above 7%, risk management has favored more aggressive rate hikes to prevent inflation from becoming entrenched.
Robert Kaplan, who served as president of the Dallas Fed from 2015 to 2021, said starting the easing cycle with a 50 basis point rate cut makes sense if officials think about which choice they are less likely to regret at this week’s meeting.
“If I were still in my old job, I would say, ‘I’m OK with a 25 basis point cut, but I’d be more in favor of a 50 basis point cut,’ ” said Kaplan, now vice chairman at Goldman Sachs. He said the Fed’s benchmark rate should be about 100 basis points lower than it is now, given inflation and unemployment.
Kaplan said that because inflation has not been fully defeated, the Fed should avoid further weakening of the economy, which would force the Fed to cut interest rates faster or more sharply to avoid sparking inflation again.
He said Fed officials are unlikely to regret making a bigger rate cut this week if the economy does poorly between now and the next meeting in early November because rates will still be relatively high. But officials would regret more if the Fed takes smaller action and the labor market deteriorates more quickly.
Minutes of the Fed's late July meeting showed that some officials supported a rate cut at the time, but most preferred to wait. And July hiring data released two days after the Fed's July meeting was far below expectations.
“The Fed is already one meeting behind, and they have a chance to catch up. But if I could do it over again, I would have cut rates in July,” Kaplan said. “I would rather correct this now and get ahead of the curve than be behind the curve all fall and chase the economy down.”
Where is the way forward?
Just as important as the Fed’s decision on how much to cut rates this week will be its quarterly economic projections, which show officials’ expectations for where interest rates will be at the end of the year. While not the product of the committee’s deliberations, they are often just as important to financial markets because policymakers’ rate outlook can affect a range of borrowing costs for mortgages, auto loans and corporate debt.
Updated forecasts for the September meeting are particularly informative because the Fed has only two meetings scheduled this year, in November and December, and the new forecasts will provide unusually specific input into the decisions at those meetings.
If more officials project a total of 100 basis points of cuts this year, that would mean at least one 50 basis point cut this year. Delaying a bigger cut until later in the year could raise awkward questions about why that is the best approach. The alternative is to cut rates by 25 basis points now and expect similar measures at the final two meetings of the year, while retaining the option to accelerate the pace of cuts if the economy deteriorates.
With this week's decision so close, Powell is likely to face dissent from at least one policymaker, including five regional Fed presidents and seven Fed governors, among the 12 policymakers who vote on policy. No Fed official has voted against a policy decision in two years, the longest such streak in the past half century. In addition, no Fed governor has dissented from a rate decision since 2005.
English said the Fed's rate decision this week is in a close call, which may reflect officials' uncertainty about the options. "It's not that you have half the committee members who are in favor of a 50 basis point cut and half who are in favor of a 25 basis point cut and they're yelling at each other. It's that this group of people are really not sure what the right thing to do here is," he said. "In the end, Powell may be able to build a reasonable consensus around one of these sides."
Article forwarded from: Jinshi Data