Category: Economic

Fed slashes interest rates by a half point, an aggressive start to its first easing campaign in four years

Mary Pat Campbell

Link: https://www.cnbc.com/2024/09/18/fed-cuts-rates-september-2024-.html

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Excerpt:

WASHINGTON – The Federal Reserve on Wednesday enacted its first interest rate cut since the early days of the Covid pandemic, slicing half a percentage point off benchmark rates in an effort to head off a slowdown in the labor market.

With both the jobs picture and inflation softening, the central bank’s Federal Open Market Committee chose to lower its key overnight borrowing rate by a half percentage point, or 50 basis points, affirming market expectations that had recently shifted from an outlook for a cut half that size.

Outside of the emergency rate reductions during Covid, the last time the FOMC cut by half a point was in 2008 during the global financial crisis.

The decision lowers the federal funds rate to a range between 4.75%-5%. While the rate sets short-term borrowing costs for banks, it spills over into multiple consumer products such as mortgages, auto loans and credit cards.

In addition to this reduction, the committee indicated through its “dot plot” the equivalent of 50 more basis points of cuts by the end of the year, close to market pricing. The matrix of individual officials’ expectations pointed to another full percentage point in cuts by the end of 2025 and a half point in 2026. In all, the dot plot shows the benchmark rate coming down about 2 percentage points beyond Wednesday’s move.

Author(s): Jeff Cox

Publication Date: 18 Sept 2024

Publication Site: CNBC

Interest Rates Are Too High. The Fed Should Cut by a Half Point.

Mary Pat Campbell

Link: https://www.wsj.com/economy/central-banking/interest-rates-are-too-high-the-fed-should-cut-by-a-half-point-e7855ea8

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Excerpt:

A year ago inflation as measured by the consumer-price index was 3.2%. In August, it was 2.5%. In that time, core inflation, which excludes food and energy, has fallen from 4.2% to an estimated 2.7%, using the Fed’s preferred gauge, the price index of personal-consumption expenditures, or PCE.

The gap between 2.7% and the Fed’s 2% target largely reflects the lagged effects of higher housing, auto and other prices from a few years ago. Some alternative indexes attempt to exclude such idiosyncratic factors. Harvard University economist Jason Furman averages several over different time horizons to yield a single, PCE-equivalent underlying inflation rate. It was 2.2% in August, the lowest since early 2021.

Inflation is likely to keep falling. Oil has plunged from $83 a barrel in early July to below $70 on Friday. This will directly lower headline inflation and, indirectly, core inflation because oil is an input into almost every business. A study by Robert Minton, now at the Fed, and Brian Wheaton at the University of California, Los Angeles, found oil can explain 16% of fluctuations in core inflation, and it takes two years for 80% of the effect to show up.

Author(s): Greg Ip

Publication Date: 15 Sept 2024

Publication Site: WSJ

Suddenly, there’s a 59 Percent Chance of Half-Point Interest Rate Cut by the Fed

Mary Pat Campbell

Link: https://mishtalk.com/economics/suddenly-theres-a-59-percent-chance-of-half-point-interest-rate-cut-by-the-fed/

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Excerpt:

A month ago I expected a 50 basis point cut by the Fed based on weakening data.

The data weakened alright, but following the the CPI report last Wednesday, I checked the odds at 15 percent.

Late Sunday, I decided to check the probabilities again and captured the above chart.

There was a huge rally in the odds on Thursday and Friday as noted by the Wall Street Journal in the chart below.

Author(s): Mike Shedlock

Publication Date: 16 Sept 2024

Publication Site: Mish Talk