Yesterday evening bought an example of one of the main themes I have about central banks. That has been that they respond much more quickly to fears about economic weakness than inflation rising in a clear example of assymetry. In fact these phases show a clear abandonment of the inflation target as they switch to supporting the economy. So we got this.
In support of its goals and in light of the shift in the balance of risks, the Committee decided to lower the target range for the federal funds rate by 1/4 percentage point to 4 to 4‑1/4 percent. In considering additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.
So not only a cit in US interest-rates but a hint that there will be more. It did not take long before they were kind enough to confirm my theme.
Inflation has moved up and remains somewhat elevated.
There was further confirmation of this as their statement of economic projections raised the inflation forecast for 2026 from 2.4% to 2.6%. So they are cutting rates in spite of inflationary risks.You may recall the period of Average Inflation Targeting mentioned from time to time by Andrew Baldwin in the comments. Well it is quite clear that it was another way of easing policy. I know that it has now been dropped which also confirms my view that it was a one-way effort, but if you do not bear down on inflation after the cost of living crisis when will you?
The projections also added another 0.25%cut for this year.
What is the real reason for the cut?
In the end they always prioritise the labour market.
Recent indicators suggest that growth of economic activity moderated in the first half of the year. Job gains have slowed, and the unemployment rate has edged up but remains low.
And again combined with a claim about the mandate that is simply untrue.
The Committee is attentive to the risks to both sides of its dual mandate and judges that downside risks to employment have risen.
We can learn some more via Chair Powell’s mouthpiece at the Wall Street Journal Nick Timiraos.
When the Federal Reserve cut interest rates Wednesday, it looked like routine monetary policy.
No it did not if you look at inflation. Then we got a more complex argument.
For the third time in his tenure, Powell is attempting the delicate maneuver of cutting rates not because a recession appears imminent, but rather to prevent one. His 2019 effort was interrupted by the pandemic before its effectiveness could be judged. Last year, the labor market steadied itself, but a decline in inflation stalled this year amid rising prices that could reflect the effects of large tariff increases by Trump.
This has 2 main features to my mind. The first is another confirmation that he is only an inflation targeter when he is forced to as he did not act to prevent inflation and instead fed us the temporary” line. Then we see the attempt to explain how we got a 0.5% cut this time last year whereas this only a 0.25%. I can only remind you of what I wrote at the time. From the 19th of September last year.
But I seem to be rather alone in arguing for the point that central banks should avoid making moves at election time.
Making a move like that ahead of the election broke the rule that central banks avoid doing such things. In an irony it was a supporter Paul Krugman rammed home the politics of this.
I would like to see the Fed cut by 200, 250, 300 basis points quite quickly, right away, with rhetoric that makes it clear that this is just the beginning.
Whereas if we switch to September 9th this year suddenly such a move is really awful according to Paul.
Trump has announced that not only should the Fed lower the Fed funds rate, the short-term interest rate that the Fed controls, but that it should be lowered by 300 basis points. That would be dropping the current rate from 4.5 to 1.5. That’s an enormous drop – one which has never been done except in the teeth of a deep recession.
Paul Krugman confirms it is all about politics and that rather drops the Federal Reserve in it as for example the case for a weaker economy has been made by the employment numbers produced by the Bureau of Labor Statistics.
The reason? A meaningful slowdown in the pace of job growth this summer……….Revisions lowered three-month average job gains to 29,000 in August from an initially reported 150,000 in June. ( Nick Timiraos)
Indeed the case continues.
The figures suggest “there really is meaningful downside risk,” Powell said.
So why cut by less than last year then?
An International Perspective
If we switch to this then we see another theme of these times.
*JAPAN’S NIKKEI 225 INDEX RISES TO NEW ALL-TIME HIGH ABOVE 45,000. ( Investing.com)
Back on September 30th last year I wrote a blog asking if falls in equity markets would be made illegal. It was a little tongue in cheek but we have seen all-time high after all time high since then with Japan leading the way this morning. For those who do not follow Japan it did not quite make 40k in the boom of 1989 and spent The Lost Decade(s) in quite a bear market. Now look at it go! There are all sorts of consequences here also for the path for Japanese interest-rates and the Japanese Yen where the UK Pound £ is now at 201.
The US stock market has also surged leading to a curious outbreak of denial from the financial media. I have pointed out previously how much egg is on the face of the Financial Times from this sort of thing and now Bloomberg is at it too.
Donald Trump’s efforts to rewire global trade and pressure the Federal Reserve into cutting interest rates are prompting investors to trim their US exposure, according to Mercer.
How is the S&P 500 around 6600 if so please?
Plus switching to currencies we have in recent times seen a development which causes real trouble for economics 101. The Euro is at 1.18 versus the US Dollar when it has seen many more interest-rate cuts and economic growth is poor.
Also my old rule was back in play as we saw this earlier in the day.
The Bank of Canada today reduced its target for the overnight rate by 25 basis points to 2.5%, with the Bank Rate at 2.75% and the deposit rate at 2.45%.
Comment
As you can see whilst economics takes the headlines actually you could argue it has had very little to do with recent US interest-rate moves. Last September was political and yesterday’s move was a sop to President Trump confirmed by how his latest appointee voted.
Voting against this action was Stephen I. Miran, who preferred to lower the target range for the federal funds rate by 1/2 percentage point at this meeting.
There is another irony in that so far the issue with bond yields has persisted in spite of interest-rate cuts and the US ten-year rose slightly yesterday. Looks lie investors fear inflation too. But however you look at it yesterday’s move was not justified if you are someone who believes in inflation targeting.
Also QT and by implication QE got a free pass as it just carries on……
