Last Friday marked one year since the Federal Reserve raised its key rate to its highest level in 22 years.
That decision — the 11th consecutive rate hike since the start of 2022 — was entirely expected. Afterward, the biggest question on everyone’s minds, from homebuyers to farmers to Wall Street, was whether another rate hike was coming to curb inflation.
At his post-decision press conference on July 26, 2023, Chairman Jerome Powell said the central bank could raise its key rate again from the new level of 5.25% to 5.5%.
Related: PCE inflation report cements timing of next Fed rate cut
But he then suggested the Fed could reject a rate hike at its next meeting in September.
September came and, sure enough, the Federal Reserve kept its rate steady. It did the same at its meeting from October 31 to November 1, 2023.
But things had changed before the meeting. Interest rates were rising again; the 10-year Treasury yield rose to 5%, pushing mortgage rates to 8%. stocks were falling.
Suddenly, in late October, the 10-year bond yield peaked and began to decline. Traders had discovered a reason: the Federal Reserve was beginning to prepare to cut rates. stocks began to rise.
Rates had risen enough
After the Fed's meeting on Dec. 17-18, Powell agreed that rates were unlikely to rise further. He now suggested that the next move in rates would be down.
Delusional investors turned a good rally into something monumental that, among other things, made Nvidia a household name. (NVDA) the maker of graphics chips that helped artificial intelligence take off.
By the end of 2023, Nvidia stock had risen 230% to $49.52 (the price reflects a 10-for-1 stock split on June 7). Nvidia is up 128% this year, even after a 19.7% correction after June 20.
But Powell did not say when rates would be lowered. In fact, inflation remained so persistent that some Fed officials thought this spring that rates might have to rise.
That was in the spring.
If the Fed does not cut rates this week, it will likely do so in September, and at his press conference and after the Fed decision, Powell will lay out a number of reasons for this first rate cut, including:
- Price inflation is approaching the Fed's target of 2% per year.
- Bond yields are falling, as are mortgage rates, which are now around 6.8%.
- Housing activity remains weak. Sales of new and existing homes in June were weaker than expected.
- The robust labor market of recent years is less robust.
I might also mention that business bankruptcies have increased substantially compared to last year, with small businesses being the most vulnerable.
Reality breaks into the fight against inflation
So why wait any longer?
And Powell may have needed time to get the Fed's inflation hawks to accept the decision.
And that drives Fed insiders like Bill Dudley, a former Fed vice chairman, a little crazy. He thinks the Fed should cut rates now because its delay is making a recession inevitable. His main concern, as he noted in a July 24 Bloomberg column, is this:
“Deteriorating labor markets create a self-reinforcing vicious circle. When jobs become harder to find, households cut spending, the economy weakens, and businesses reduce investment, leading to layoffs and further spending cuts.”
Dudley is a veteran of the Federal Reserve. He had been a proponent of keeping rates high until it was time to cut them. The time to cut them is now, he wrote.
More economic analysis:
- June jobs report bolsters bets on Fed rate cut in fall
- Biden's debate failure boosts Trump, but economy may be tougher opponent
- First-half market gains come with a hint of investor unease
So rate cuts are on everyone's lips now and will be a big part of the Fed's agenda during its two-day meeting that starts on Tuesday.
If the Fed does not cut rates on Wednesday (as is widely believed), Jerome Powell will likely say that the inflation outlook has improved greatly and that the chances of inflation picking up are diminishing by the day.
And we can mark September 18 as the day the Fed will announce its first rate cut since March 2020, during the worst of the Covid-19 pandemic.
Related: Veteran fund manager sees world of trouble ahead for stocks
