RE:RE:Hmm shakeout ahead of the FED?From the TD desk...
Fed officials have puzzled in recent months over why their interest-rate stance, which influences the cost of mortgages, business debt, auto loans and credit cards, hasn’t done more to slow the economy. But several measures of labor-market conditions are back to levels last seen in 2018 and 2019, when growth was solid but inflation was low—a sign that monetary policy has worked to slow economic activity.
Fed Chair Jerome Powell has in recent months pointed to how a surge of immigration last year boosted demand as well as the ability of the economy to supply more goods and services without the price pressures witnessed in 2021 and 2022, when supply chains and businesses struggled with the reopening from the pandemic.
Powell and his colleagues face a dilemma. They don’t want to cut rates without more convincing evidence their policy stance is as restrictive as they think it is, but they are uneasy that by the time they see that evidence, it will be too late to avoid a big rise in unemployment.
The Fed raised rates at the most rapid pace in decades in 2022 and 2023 to combat high inflation, and many economists have marveled at how the economy has weathered those increases so far. But there are risks that the banks and companies least prepared for and most vulnerable to higher rates will encounter serious challenges if interest rates don’t come down as widely anticipated.
Americans are gloomy about the state of the economy, thanks largely to the cumulative toll of yearslong price pressures and elevated borrowing costs. Consumers are taking little comfort from milder annual inflation rates because the run-up in the price of everything from housing to groceries to cars since 2021 has been unusually large. Over the last four years, prices are up 22%, compared with 7% in the four years before that.
And slower inflation hasn’t yet translated to lower borrowing costs: The 30-year fixed-rate mortgage has hovered around 7% in recent months, near the highest level since 2001, while banks are charging 22% interest on credit cards.
Now, the Fed must weigh rate cuts that could ease those pressures against the potential that easier policy may propel spending and prop up inflation, said Cindy Beaulieu, chief investment officer for North America at asset manager Conning.
“There’s a real risk to that,” she said.