According to the Fed’s “preferred” inflation measure, the Personal Consumption Expenditures Index (PCE)—you know, the one that excepts those extraneous things you never buy, things like food and gas—well, according to recent PCE readings the Fed has been doing a terrific job, justifying the formal shifting of its interest rate outlook. That is, while not promising to cut rates it is in effect laying the necessary groundwork, providing itself the flexibility to do so if, in its words, “the risks to achieving its employment and inflation goals [continue] moving into better balance.”
For context, at its most recent meeting on Wednesday Federal Reserve Chair Jerome Powell announced rates would be remaining between the range of 5.25% and 5.5%. With PCE and CPI readings both remaining above the long-term target rate of 2%, at 2.6% and 3.4% respectively, this seemed prudent to say the least. However, parsing the nuances of Fed Speak, the shift from hawkish talk six months ago of possible “additional policy firming,” i.e. higher interest rates for longer, to the more neutral/dovish language of “In considering any adjustments to the target range for the federal funds rate…the Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent,” makes the multiple December predictions by officials of multiple rate cuts by the end of the year look increasingly likely to come true.
And, really, the government needs rates cut as soon as possible.
First, while Janet Yellen was busy lecturing everyone about equality and climate change after taking the top job at Treasury, she neglected to refinance several trillion dollars of short term debt. Because, you know, nothing says a decade-plus in the government like dropping the most basic of balls, failing to lock in rock bottom interest rates and costing taxpayers hundreds of billions issuing short term securities if the Fed doesn’t prove willing to simply hold onto those bonds for Treasury—something it is far from clear Powell, or his successor, will choose to do.
Second, and relatedly, there’s the matter of financing that nearly two trillion dollar annual deficit. That’s right, MMT fanatics are about to eat their hearts out, because the government is going to be printing money like there’s no tomorrow—according to the Congressional Budget Office (CBO) the average annual deficit for the next decade is going to be a cool $2 trillion. Hey, in the long run we’re all dead, right? John Maynard Keynes’ most oft quoted and inane remark aside, there is serious trouble brewing, as debt will be stacked on top of debt with no end in sight. Already, debt service costs, that is paying the interest on the debt, is on track to become the single biggest outlay in the federal budget in coming years. Lower interest rates will help at the margins, but at the expense of the real economy over the long term. The endgame is unclear, but expect a third technical, if not outright, default on the national debt at some point.
Lastly, it’s an election year; and in the tradition of all governments and leaders, when a fight is hopeless it is best to just declare victory and quit, trusting to your loyal propaganda mouthpieces, public and private, to trumpet your unrivalled successes. And have you seen the latest numbers? Talk about BS. For all that Paul Krugman and The New York Times might marvel at the U.S. economy and wonder how the average American could be so confused as to how great it is, let’s be real: the headline jobs numbers are as a rule always revised down, and the trumpeting about “strong consumer spending” comes from the necessity of people to live and from those whose so-called “doom spending” is a product of their having given up on trying to save, a house or eventual retirement both being laughably out of the question.
Of course, the banks are happy to play along, talking to the business press as though the economy under Joe Biden really is on a tear: after all, apart from loving cheap(er) money the banks need rate cuts to bring their bond portfolios out of the deep red where they’ve been lodged for the past two years, prices and interest rates moving inversely (remember SVB?).
Yes, despite interest rates being far below the historical trend line, the forces of globalization that allowed this to happen (at least for a while) being largely in retreat, the risk of inflation resurging being quite real, and the rate of inflation still being almost 60 percent higher than the Fed’s target rate, rate cuts seem set to roll out in earnest in 2024.
For what it’s worth, markets are betting on six rate cuts by the end of the year.
If that sounds extreme, you’re probably right. But then, this is increasingly an age of extremes.
