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Saturday, July 20, 2024

Fed Now Envisions Just One Rate Cut This Year as Bidenflation Persists Above Expectations

'We’re pretty pessimistic of the rates even getting down to 5% in the next 12 months. Right now, we’re just pretty much stuck...'

(Headline USA) Federal Reserve officials signaled Wednesday that they expected to cut their benchmark interest rate just once this year due to the ongoing scourge of Bidenflation, which has yet to come anywhere close to reaching its target level at around 2%.

The policymakers’ forecast for one rate cut was down from their previous projection of three cuts.

The scaled-back estimate for rate cuts came as something of a surprise, given that the government reported earlier Wednesday that consumer inflation eased in May more than most economists had expected. That report suggested that the Fed’s high-rate polices are succeeding in taming inflation.

Nonetheless, the root cause of inflation—which is the government’s continuing to print and spend new money it doesn’t have—has persisted under the Biden administration as a matter of policy, with many of those dollars going out the door to Ukraine and other countries.

Meanwhile, the Democrat president has relied on an open-border immigration policy to artificially bolster certain segments of the job market, providing a false sense of a stable economy due to the fact that the government is continuing to hire people to meet the additional needs of its own social services.

Financial markets took encouragement, though, from the policy statement the Fed issued after its latest meeting ended, which underscored that it sees progress in its fight against high inflation. Broad stock indexes rose sharply, and bond yields fell in response.

The policymakers, as expected, kept their key rate unchanged Wednesday at roughly 5.3%. The benchmark rate has remained at that level since July of last year, after the Fed raised it 11 times to try to slow borrowing and spending and cool inflation.

Whenever the Fed does begin to reduce its benchmark rate, now at a 23-year high, it would eventually lighten loan costs for consumers, who have faced punishingly high rates for mortgages, auto loans, credit cards and other forms of borrowing.

The central bank’s rate policies over the next several months could also have consequences for the presidential race. Voters have taken a generally sour view of the economy under President Joe Biden. In large part, that’s because prices remain much higher than they were before the pandemic struck. High borrowing rates have imposed a further financial burden.

Speaking at a news conference after the Fed meeting ended, Chair Jerome Powell seemed to downplay the significance of the policymakers’ collective forecast of just one rate cut in 2024. That forecast is derived from the individual predictions of 19 policymakers, and Powell noted that 15 of the officials projected either one or two rate cuts this year.

“I would look at all of them as plausible,” he said.

“No one,” the Fed chair added, “brings to this a really strong commitment to a particular rate path. It’s just what they think in a given moment in time.”

Economists say two rate cuts, with the first one coming as early as September, are still possible despite the central bank’s prediction of just one.

“I don’t think September’s off the table,” said Matthew Luzzetti, chief U.S. economist at Deutsche Bank. “To get there, you’d have to have a string of inflation reports like the one we got this morning.”

At his news conference, though, Powell cautioned, “We’ll need to see more good data to bolster our confidence that inflation is moving sustainably toward 2%.”

He also underscored that with the economy still overall healthy, Fed officials feel little urgency to cut rates.

“What we’ve been getting is good progress on inflation, with growth at a good level and with a strong labor market,” the Fed chair said. “Ultimately, we think rates will have to come down to continue to support that. But so far they haven’t had to.”

Uncertainty over when borrowing rates might come down is keeping some consumers on edge, especially those seeking to buy a home who face painfully high mortgage rates, now averaging around 7%.

David Goines, who owns a four-bedroom, two-bath mobile home in Lexington, Oklahoma, began looking for a new house last year but was put off by the elevated mortgage rates.

“Once we calculated what our payments would be for the house that we were looking at, it was just unfeasible,” he said.

Goines, a 36-year-old information technology director, has been holding out hope that rates would ease this year. He’s still waiting.

“We’re pretty pessimistic of the rates even getting down to 5% in the next 12 months,” he said. “Right now, we’re just pretty much stuck.”

On Wednesday morning, the government reported that inflation eased in May for a second straight month, a hopeful sign that an acceleration of prices that occurred early this year may have passed.

Consumer prices excluding volatile food and energy costs—the closely watched “core” index—rose just 0.2% from April, the smallest rise since October. Measured from a year earlier, core prices climbed 3.4%, the mildest pace in three years.

“We welcome today’s [inflation] reading and hope for more like that,” Powell said.

Inflation has tumbled from a peak of 9.1% two years ago. The policymakers now face the delicate task of keeping rates high enough to slow spending and fully defeat high inflation without derailing the economy.

Measures of inflation had cooled steadily in the second half of last year, raising hopes that the Fed could achieve a rare “soft landing,” whereby it would manage to conquer inflation through rate hikes without causing a recession.

But inflation came in unexpectedly high in the first three months of this year, delaying hoped-for Fed rate cuts and potentially imperiling a soft landing.

As part of the updated quarterly forecasts the policymakers issued Wednesday, they projected that the economy will grow 2.1% this year and 2% in 2025, the same as they had envisioned in March.

They expect core inflation to be 2.8% by year’s end, according to their preferred gauge, up from a previous forecast of 2.6%. And they project that unemployment will stay at its current 4% rate by the end of this year and edge up to 4.2% by the end of 2025.

The expectation that the unemployment rate will remain around those low levels indicates that the officials believe that while the job market will gradually slow, it will remain fundamentally healthy.

“By so many measures,” Powell said, “the labor market was kind of overheated two years ago, and we’ve seen it move back into much better balance between supply and demand.”

Adapted from reporting by the Associated Press

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