Expert opinions vary widely on when the Federal Reserve will begin cutting interest rates and by how much.
Some expect one rate cut this year, others expect two, and others expect zero. Harvard economist Larry Summers even sees a 15% to 25% chance that the Fed's next rate move will be a hike.
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There are also disagreements within the Federal Reserve itself. At last week's meeting, eight Federal Reserve officials predicted two rate cuts this year, seven predicted one cut and four predicted no cut.
As for the contradictory data, the economy grew only 1.4% annualized in the first quarter. But the Atlanta Fed's forecast tool points to 3.1% growth for the second quarter, and nonfarm payrolls soared by 272,000 in May.
On the inflation front, the core Consumer Price Index, which excludes food and energy, recorded 3.4% in the 12 months to May, the lowest reading in more than three years.
Meanwhile, the Fed's favorite inflation gauge, the personal consumption expenditures index, totaled 2.7% in the 12 months through April, unchanged from March. But that figure is still well above the Federal Reserve's 2% target.
Comment from Federal Reserve Chairman Powell
At last week's meeting, Federal Reserve Chair Jerome Powell said the central bank was not yet prepared to cut rates. “We have a strong, good labor market. We believe we have been making progress toward the goal of price stability,” he said.
Related: Federal Reserve updates timeline for first interest rate cut
“We ask ourselves… is our political position correct? And we think yes, that's the right thing to do.”
The favorable CPI data for May is not enough to tip the balance, he said. “We view that report as progress, as building trust,” Powell said. “But we don't see ourselves with the confidence that would justify starting to relax the policy at this time.”
There are many possible paths for the Federal Reserve going forward. “There is still a possibility of two rate cuts this year, starting in September,” said Kathy Bostjancic, chief economist at Nationwide Mutual Insurance. he told Bloomberg.
“They need the data to comply and reinforce their trust. They err on the side of conservatism. That's understandable. “I think the door is still wide open.”
Related: CPI inflation shock resets Fed rate cut bets
Mohamed El-Erian's opinion on the Federal Reserve
Renowned economist Mohamed El-Erian, chief economic adviser at Allianz, is not so happy with the Federal Reserve's policy. “Jay Powell fails to strike the risk balance” between too bullish and too dovish policy, El-Erian told Yahoo.
What Powell and other Fed officials favor “would make them too late” to cut rates, El-Erian said. That would “allow the economy to slow down more than it should,” he said.
El-Erian noted that the median forecast by Federal Reserve officials called for a rate cut this year. If this is a “normal cycle of Fed rate hikes,” that reduction would occur in December, he said.
More economic analysis:
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- The Federal Reserve does not want to talk about stagflation. You may not have a choice.
“That's too late. By then, the delayed effect of significantly raising rates would hurt (the economy) even more,” El-Erian said. He was referring to the Fed's 2022-23 rate hikes.
El-Erian did not say exactly when the Federal Reserve should begin cutting rates. His next three meetings are July, September and November.
In terms of the impact of interest rates on you, higher rates mean more income from your savings accounts and money market funds. But they also mean higher payments on your mortgage, car, credit card, student and bank loans. Falling interest rates have the opposite effects.
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