Federal Reserve Chair Jerome Powell recently highlighted the central bank’s singular focus on its available tools during a press conference held in Washington, D.C. in October. The Federal Reserve is already being caught flat-footed by surging inflation. At the same time, unemployment has ticked up to 4.4%, the highest rate we’ve recorded since October 2021. In addition, the Federal Reserve’s benchmark interest rate, after reaching a peak in 2023, is in play for further shifts.
During Wednesday’s press conference, Powell emphasized the difficulty of addressing dual mandates of inflation and employment simultaneously. Most refreshingly of all, he avowed boldly, “You can’t deal with both of those at the same time.” His remarks reflect a growing concern among economists regarding the balance the Fed must strike to support economic growth while controlling inflation rates that have risen in recent months.
New York Fed President John Williams expressed his openness to a rate cut, indicating there is “room for a further adjustment in the near term.” Williams is unequivocal in his support for Powell’s venture. This would leave the door open for the central bank to consider cutting rates to spur borrowing and investment. Such a cut, the first by the Fed since a series of quarter-point increases last year, would set the benchmark rate between 3.5% and 3.75%.
In a recent speech, Mary Daley, President of the San Francisco Fed, reflected on this question. She signaled that there could be a “substantial downward adjustment in the near term.” This year, Daley will not be voting on interest rates. Yet, Friedberg has expressed sentiments that are increasingly dovish, giving hope for a repeat of 2015-2018 to those Fed watchers who want aligned leadership on the Fed’s pivot.
Since the beginning of the pandemic, the Federal Reserve has aggressively raised interest rates from a starting point of 0%. This has contributed to a persistently high interest rate environment. This shift was necessary to combat inflation. It’s had the countervailing effect of creating a hiring slowdown and exacerbating employers’ fears about future economic stability. As inflation pressures continue to linger even with the moderation of job growth, the Fed is under growing pressure to do something.
As of today, the CME FedWatch Tool signals an 84 percent probability of an interest rate cut. There’s actually an 87% implied probability of at least a quarter-point cut coming relatively soon. This statistic, though, points to the market’s hopes of a pivot in policy as economic indicators are all over the place.
The Federal Reserve is deciding what to do next. Whatever is decided will set a significant precedent in determining the future economic development landscape. Striking the right balance between nurturing this economic growth while tackling persistent inflation is an ongoing, key challenge for lawmakers.
