No one knows how Tuesday’s presidential election will turn out, but the Federal Reserve’s move two days later is much easier to predict: With inflation continuing to cool, the Fed is set to cut interest rates for a second time this year
FILE - Federal Reserve Board Chairman Jerome Powell speaks during a news conference at the Federal Reserve in Washington, on Sept. 18, 2024.
The Fed is reducing its rate for a different reason than it usually does: It often cuts rates to boost a sluggish economy and a weak job market by encouraging more borrowing and spending. But theInstead, the central bank is lowering rates as part of what Powell has called “a recalibration” to a lower-inflation environment. When inflation spiked to a four-decade high of 9.1% in June 2022, the Fed proceeded to raise rates 11 times — ultimately sending its key rate to about 5.
“For me, the central question is how much and how fast to reduce the target for the rate, which I believe is currently set at a restrictive level,” Christopher Waller, an influential member of the Fed's Board of Directors, said in a speech last month. Powell and other Fed officials acknowledge that they don't know exactly where the neutral rate is. In September, the Fed's rate-setting committee estimated that it was 2.9%. Most economists think it's closer to 3% to 3.5%.
“If the unemployment rate stays in the low 4's and the economy is still going to grow at 3%, does it matter that the rate is 4.75% to 5%?” said Joe LaVorgna, chief economist at SMBC Nikko Securities, asked. “Why are they cutting now?”
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