After the Wednesday, Sept. 11, inflation report came in on target, markets are even more confident the Federal Reserve will cut its rate by 25 basis points following its policy meeting next week. In August, Fed Chair Jerome Powell said it was time for policy to adjust after an “unmistakable” weakening in the labor market. But how much adjusting is coming down the pike after September?
The federal fund target range is a benchmark rate for lending. Since July 2023, the Federal Open Market Committee has held the range between 5.25% and 5.5%, its highest level in more than two decades.
Markets initially expected rate cuts to come much earlier in the year, but after inflation remained stickier than anticipated, September would mark the first rate cut since early 2020 after five straight months of cooling consumer price inflation.
If the Fed decides to cut in September, it will mark the beginning of a rate-cut cycle. After the Fed’s decision on Sept. 18, the committee will meet two more times in 2024, the two days after the November election and Dec. 17-18. For more on how much the Fed may cut this year and next, Straight Arrow News spoke with the Fed Guy Joseph Wang.
The following transcript is edited for length and clarity. Watch the full clip in the video above and catch the entire interview on Straight Arrow News’ YouTube page.
Joseph Wang: So the market is pricing in a very, very aggressive Fed cut cycle, so aggressive that the market is pricing by the end of next year, the overnight rate will be below 3%. So that’s from 5.5% today to below 3% next year.
Now that’s a very aggressive rate path, expected policy pricing by the market, and that seems to assume a significant deterioration in the economy.
Let’s look at the big picture, though. The most recent GDP statistics in the US were revised upwards from 2.8% annual growth rate to 3%, so the economy is actually growing fine. There’s really no indication that we would just suddenly go from 3% to a recession where we don’t grow, we shrink.
Jobs reports, again, slowing, but we’re still creating over 100,000 jobs a month. When we’re in a recession, we don’t create 100,000 jobs a month, we lose 100,000 jobs a month. And so the pricing in the market seems to be pretty aggressive from my perspective, I think there’s too much doom and gloom being priced in.
My base case expectation is that rather than having a series of huge cuts that the market is assuming that we have, [we have] some steady 25-basis-point cuts, and maybe the cut cycle ends, let’s say around 3.5%, rather than below 3%. I say this because, by all indications, the economy continues to have momentum and there’s a good case to be made that rather than falling into recession, we really are just normalizing now.
One other thing that I would mention is that something that’s happening today that hasn’t happened before is that we have tremendous amounts of fiscal spending. The government is expected to have a fiscal deficit of about a couple trillion dollars, basically forever, and when you have the government spending so much each year, that’s very supportive of demand. It’s upward pressure on inflation. It’s not a very good management of the currency, but it is supportive of demand.
And so when you have that kind of fiscal spending, I think that’s a good tailwind. Now, one other thing to keep in mind is that what happens in November could have very big implications for macro policy. We have two candidates with very, very different visions of the world. We also have to look at Congress to see whether or not they are able to carry out their different visions of the world.
So there’s a lot of uncertainty there. But based on what I see right now, the economy is still okay, and the rate cuts in the markets are too aggressive. We’ll have some, but it doesn’t seem like we would have so many, because it doesn’t seem like at the moment that we are tumbling into recession.
