Wall Street is increasingly worried that the Federal Reserve may be making a policy mistake by cutting interest rates in a heated economy where inflation remains above target.
Market commentators express fear that the Federal Reserve might err by reducing rates too swiftly, potentially causing a rebound in inflation. Investors currently foresee a high probability of a quarter-point rate cut at the upcoming Federal Open Market Committee meeting. However, there is growing concern that this move could be premature given the recent rise in inflation numbers.
Former Federal Reserve officials have echoed these concerns. Richard Fisher, the ex-president of the Dallas Fed, argues against trimming rates, highlighting that inflation is firmly above the desired 2% mark. According to the latest consumer price index, prices rose by 2.7% in November compared to 2.6% in the previous month, reinforcing his viewpoint.
The economy’s robust state further complicates the decision. The GDP growth is projected at 3.3% for the fourth quarter, and job growth remains strong, with 227,000 new jobs added in November—figures surpassing expectations. Richard Fisher suggests that financial conditions are already accommodating, prompting his advice for a pause on rate cuts.
Frederic Mishkin, another former Fed Governor, warns that reducing interest rates while inflation is above target could destabilize the economy. Such actions might disrupt inflation expectations, possibly leading to stagflation, a situation marked by slow growth and high prices. Mishkin emphasized the importance of maintaining a strong nominal anchor in economic policies.
Adding to the discourse, Darrell Cronk from Wells Fargo cautions that a rate cut in December might prove to be a misstep. Corporate earnings are strong, indicating that current policies might already be sufficiently loose. Cronk questions the need for cuts when corporate earnings are expected to grow significantly next year.
The possibility of rate cuts echoes scenarios from the mid-1990s where the Fed reversed its policy after initial cuts. Torsten Sløk, Apollo’s chief economist, suggests that strong economic growth coupled with inflation might force the Fed to resume hiking rates by 2025.
Despite these expert opinions, market indicators like the CME FedWatch tool reveal a near-certainty of a rate cut in the upcoming meeting, with traders pricing in a 97% likelihood. However, the odds of maintaining rates in January are increasing, dropping from a 27% chance of rate reduction to just 17%.
The Federal Reserve faces a complex decision as it navigates economic growth and inflation. With divided opinions from former officials and market analysts, the potential for policy error looms large. The outcome of the upcoming meeting could significantly impact future economic stability.
Source: Businessinsider
