The U.S. economy doesn’t need interest rate cuts

The U.S. economy is cruising along well, and there’s no urgent need to slash interest rates. John Williams, President of the Federal Reserve Bank of New York, has made it clear that the economy is on a positive path.

Also Read: Federal Reserve’s key inflation metric goes bearish on US economy

However, the Fed president isn’t committing to when he might support cutting interest rates. He emphasized that any decision about easing policy this year will depend on incoming economic data. He highlighted that recent inflation figures are promising, and he expects price pressures to keep easing.

Current outlook on U.S. interest rates

Williams noted that there are positive signs of supply and demand balancing out. “I do see a disinflationary process continuing,” he said during an interview . He expects inflation to decrease in the second half of this year and into next year. Williams described the U.S. economy and labor market as “incredibly strong,” although there’s some slowing in hiring.

John Williams. Credits: Wall Street Journal

He pointed out that business job data remains strong, even if household data suggests some weakness. Williams hinted that payroll reports could be overstated, and the Fed will gather more information in the coming months. Fed officials have dialed down their expectations for rate cuts this year. The median forecast shows only one decrease, with the benchmark rate staying in the range of 5.25% to 5.5%, which is a two-decade high.

Last month, Williams mentioned there’s “ample evidence” that the Fed’s current policy is impacting the economy. He also expected inflation to continue cooling in the latter half of the year. Williams avoided answering whether the Fed can cut rates this fall without facing accusations of political favoritism.

Also Read: JPMorgan warns of recession! Is the US economy doomed?

“The most important thing to do is to get the decision right,” he said, adding that politics should be ignored. Mohamed El-Erian, President of Queens’ College, Cambridge, expressed a viewpoint shared on Wall Street, saying:

It doesn’t matter when the Federal Reserve starts cutting rates. What really matters is where they finish.

El-Erian’s opinion overlooks the importance of the timing of the first cut. In current circumstances, the timing is important for determining the overall impact of the cycle and the economy’s health. The argument is that the first rate cut allows markets to price the entire cycle with more confidence. However, today’s data-dependent Fed has refrained from taking a strategic view, and this approach is unlikely to change soon, says El-Erian.

Fed’s policy approach doesn’t make much sense

The Fed’s lack of a clear strategy for fighting inflation has left fixed-income markets without clear guidance. This is evident in the behavior of U.S. Treasury yields, whether it’s the policy-sensitive 2-year bond or the 10-year bond, which reflects broader market views of the entire rate cycle, inflationary expectations, and growth outcomes.

Also Read: US economy still sizzling, beyond Fed’s goal reach

Philadelphia Fed President Patrick Harker added to the discussion by stating that the U.S. Federal Reserve might be able to cut its benchmark interest rate once this year if his forecast proves accurate. “If all of it happens to be as forecasted, I think one rate cut would be appropriate by year’s end,” he said. He shared his view that the economy will see slowing but above-trend growth, a modest rise in unemployment, and a gradual return to target inflation as his base case.

Patrick Harker. Credits: Bloomberg

Harker’s comments align with the broader perspective that while there might be room for one rate cut, the focus remains on closely monitoring economic data. The central bank is walking a fine line, balancing ensuring economic growth and keeping inflation in check. Wall Street is keenly watching out for any signals from the Federal Reserve, trying to gauge how many rate cuts America can afford in 2024.

Cryptopolitan reporting Jai Hamid