President Joe Biden was hoping for a lift from the Federal Reserve this year. On Wednesday, the Fed dealt those hopes a blow.
Jay Powell, the central bank’s chair, confirmed what many have suspected for some time: interest rate cuts in the world’s biggest economy are not imminent. The economy remains too hot to start loosening monetary policy and the Fed’s mission to beat inflation back to its 2 per cent target is not complete.
The high borrowing costs American voters complain about are likely to linger at least until November’s presidential election.
It marks a dilemma for Biden and Powell. The US economy is strong: humming along at a pace above those of other advanced economies, and close to full employment. But that strength is a big reason why the Fed is likely to leave rates higher than voters, or the president, would like.
The Federal Open Market Committee admitted as much on Wednesday in Washington, noting it had made little headway in recent months towards hitting the central bank’s inflation goal. The language in its statement all but ruled out a cut in June, when the Fed meets next.
High rates would “need more time to do their job”, Powell said, and it would “take longer” for rate-setters to be confident enough to begin cutting them — words that immediately cast doubt on cuts in July too.
It leaves the world’s most important central bank in an awkward position ahead of an election between Biden and Donald Trump. Rate cuts late in the election campaign could appear to favour Biden. Not cutting might help Trump.
Powell was adamant in his post-meeting press conference that the central bank’s rates will not be set according to this year’s political calendar. That leaves a cut at September’s Fed meeting in play — though analysts believe that the move would come too close to the vote on November 5.
“It’s going to be right in between two presidential debates,” said Vincent Reinhart, chief economist at Dreyfus and Mellon, referring to the September 18 FOMC vote. “The FOMC, appropriately, cares about the public reception to its actions. Around the time of an election, the public may be confused about its intent. You need to pick a spot where you’re sure the public will understand why you’re doing what you’re doing.”
Heading into elections with the US’s benchmark borrowing cost at a 23-year-high range of 5.25 per cent to 5.5 per cent — and with mortgage rates and credit card interest levels far higher — would be a blow to Biden’s efforts to win over voters who think the economy was stronger under Trump.
That the Fed has now been forced to leave rates higher for even longer is a grim reminder that, for almost all of Biden’s first term, inflation has been uncomfortably high.
Price pressures have acutely affected the cost of food, energy and housing — goods that Powell on Wednesday referred to as “the fundamentals of life” — making inflation the number one economic issue facing the electorate by far.
The Fed chair also cast doubt on whether the central bank would be able to pull off a soft landing, guiding inflation back down to 2 per cent without crashing the economy or inducing widespread job losses.
Powell was “not giving up” on a Goldilocks scenario, he said on Wednesday. The arrival of more workers into the US labour market, for example — a benefit to the economy now overshadowed by political rhetoric about immigration — had helped subdue price pressures in 2023, he noted. It could “work to bring inflation down” this year too.
The Fed chair remained upbeat, saying his “personal forecast” was that the central bank would make some progress towards 2 per cent this year, as rental costs stopped rising so quickly. Even so, he did not know the cooling would be “sufficient” to cut rates in 2024.
“We’re going to have to let the data lead us on that,” he said.
Those messages on Wednesday from the Fed all contrasted with more bullish forecasts it offered earlier in the year, which signalled that the soft landing was its baseline scenario.
Yet for both Biden and the investors that follow the Fed’s every move, Wednesday’s dose of hard reality from the central bank could have been worse.
A series of data releases pointing to higher-than-expected inflation had fed concerns among some market participants that the next move in rates could be up. Powell allayed those worries on Wednesday, saying rate rises to squelch the inflation uptick were “unlikely”. Stocks listed in New York rose initially, before falling later in the day.
“Clearly the threshold to raise is higher than to cut, but both are high,” said KPMG US chief economist Diane Swonk.
“The Fed is not confident about how quickly it can get inflation to 2 per cent, but it’s confident that rates are high enough,” said TS Lombard chief economist Steven Blitz.
And Powell was also quick to point out that the Fed’s position on rates was a reflection of the strength of the US economy — a subtle dose of good news for anyone watching in the White House.
Powell acknowledged the Fed would trail its counterparts on the other side of the Atlantic — such as the European Central Bank, which is set to cut in June — but only because the American economy was so much healthier than others.
“The difference between the United States and other countries that are now considering rate cuts is that they’re just not having the kind of growth we’re having,” he said. “They have their inflation performing like ours, or maybe a little better, but they’re not experiencing the kind of growth we’re experiencing.
“We actually have the luxury of having strong growth and a strong labour market, very low unemployment, high job creation, and all of that,” he added. “And we can be patient and we’ll be careful and cautious as we approach the decision to cut rates.”