Markets wonder when U.S. Federal Reserve will cut interest rates
It’s odd that, at the time when the U.S. Federal Reserve has reached new heights in its most aggressive interest-rate hiking cycle in more than a quarter-century, market talk is pivoting to when the Fed will startBut we live in odd economic times. It’s not often that the Fed feels compelled to raise rates in the teeth of an economic downturn.
In the first quarter of this year, the U.S. economy shrank at an annualized pace of 1.6 per cent, and the data since then suggest that the quarter was no aberration. On Thursday, when the U.S. Commerce department releases its first estimate of second-quarter gross domestic product, few experts would be surprised if it reports another small contraction. Consumer spending has slowed. Business investment has slowed. Industrial production and construction have fallen.
Against this darkening backdrop, economists and market participants are wondering how long the Fed will keep it up – even as Fed chair Jerome Powell indicated in a postannouncement news conference that the bank still expects to continue raising rates over the rest of 2022 and into 2023. But history is probably less useful than usual in this instance. The downturn in rate cycles over the past three decades has come in an environment of much lower and more stable inflation. Today, the inflation problem implies a greater need to push rates higher, and to keep them there for longer. The inflation-fighting job of monetary policy is simply much bigger today than it has been in other recent rate cycles.
But Mr. Powell made it quite clear in Wednesday’s news conference that the Fed’s priority is to wrestle inflation into submission, even if that risks setting off an economic downturn and an erosion of labour markets.
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