Wednesday, October 9, 2024

The Rate Debate: Should the Fed Act Now to Save the Economy?

Yonhap News

The Federal Reserve is widely anticipated to keep interest rates unchanged following its monetary policy meeting on July 31.

Some economists argue that reducing rates now could be prudent as expectations rise for a potential rate cut at the upcoming Federal Open Market Committee (FOMC) meeting in September.

CNN Business reported on Tuesday that while Fed officials have hinted at the possibility of a rate cut in September, there is no immediate cause for concern as long as the U.S. economy remains stable. The overall economic outlook will be crucial whether the cut occurs in July, November, or December.

Expert opinions on the timing of a Fed rate cut vary significantly. Former Fed Vice Chair Alan Blinder and Nobel laureate Paul Krugman of the City University of New York advocate for a rate cut at this FOMC meeting, emphasizing that monetary policy adjustments typically take time to impact the economy.

In a June 28 op-ed for The Wall Street Journal, Alan Blinder argued that cutting interest rates now would be more beneficial than waiting until September or December, questioning, “Why wait?”

U.S. inflation, which previously soared to a 40-year high, has since moderated and is now approaching the Federal Reserve’s 2% target. Advocates for an immediate rate cut argue that maintaining rates at last year’s 5% to 5.25% range to lower inflation could pose risks to economic stability.

Signs of economic contraction align with the Fed’s objectives, including a decrease in job numbers and rising unemployment. Companies are reducing their workforce more than hiring, and consumer spending has shown signs of weakening recently. These trends raise concerns that the economy could become more vulnerable if they persist.

However, it’s important to note that falling prices are not guaranteed. The Consumer Price Index (CPI) unexpectedly surged to 3.5% in March, demonstrating that inflationary pressures can still fluctuate.

Torsten Slok, Partner and Chief Economist at Apollo, an asset management firm, insists that the Fed will maintain its current interest rates for the rest of the year.

He said, “There are two CPI reports remaining before the September 18 FOMC meeting,” suggesting that monitoring will be necessary if inflation continues to trend downward.

Slok noted the resilience of U.S. employment and consumption and stated that the expectation of three rate cuts this year is incorrect.

Sean Snaith, the director of UCF’s Institute for Economic Forecasting, also believes that the U.S. economy is more substantial than expected, and there is no rush to lower rates, predicting that the Fed will not cut rates until 2025.

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