The Journal. - Why the Fed Is Steering Away From Rate Cuts

Episode Date: April 17, 2024

Yesterday, Federal Reserve Chair Jerome Powell called into question whether the Fed will be able to lower interest rates this year as hoped. WSJ’s Nick Timiraos on how the Fed’s outlook on the economy has changed.  Further Reading: - Powell Dials Back Expectations on Rate Cuts  - Fed Rate Cuts Are Now a Matter of If, Not Just When  Further Listening: - Janet Yellen on Inflation and the U.S. Economy  - Inflation Is Down. Unemployment Is Low. Is This a Soft Landing?  Learn more about your ad choices. Visit megaphone.fm/adchoices

Chairman Powell, really interested in hearing your perspective. Yesterday, Federal Reserve Chairman Jerome Powell sat down for a conversation with his counterpart from the Bank of Canada. Why don't you call me Jay and call him Tiff? Powell talked about some important things, like Canadian exports. And that is Canadian comedians and comic actors. I started to count the number of really great, funny people, and I limited myself to 10. So Jim Carrey, Martin Short, John Candy, Mike Myers,

Norm MacDonald, Rick Moranis, Dan Aykroyd. But jokes aside, this was Powell's first chance to publicly respond to some recent inflation numbers. This inflation data raised questions about whether the Fed would cut interest rates this year, as had been expected. And Powell's remarks yesterday indicated a clear shift in the Fed's outlook. The recent data have clearly not given us greater confidence and instead indicate that it's likely to take longer than expected to achieve that confidence. What the Fed chair said yesterday was that you don't get interest rate cuts if inflation doesn't keep going down.

That's our colleague Nick Timoros. So, you know, everybody on Wall Street had been talking about, well, the Fed cut rates in June. There were expectations you would get three cuts this year starting in June. That's gone away now. Welcome to The Journal, our show about money, business, and power. I'm Kate Leinbaugh.

It's Wednesday, April 17th. Coming up on the show, will the Federal Reserve cut interest rates at all this year? Discover exciting games and events. Plus, find amazing hidden gems in cities full of adventures, delicious food, and diverse cultures. You'll love it so much you'll want to extend your stay beyond the matches. Get the ball rolling on your soccer getaway. Head to visittheusa.com.

All right, Nick, before we dig in, I want to know who is your favorite Canadian comedian? Oh, geez. I used to be a Jim Carrey fan. I mean, in the 90s, if you were like a teenage boy, Jim Carrey was pretty cool. So I'll go with Jim Carrey. And for the record, mine is Catherine O'Hara. I'm also a Schitt's Creek fan. So that's just as well. So now that we have that out of the way, let's start talking about the economy. And let's go back to the end of last year. How was the economy looking? At the end of last year, the economy was looking great.

It was like nirvana for central bankers in particular. What is nirvana for central bankers? Strong growth and inflation almost out of nowhere just comes cruising down towards the Fed's 2% goal. In the last six months of last year, inflation, the six-month annualized inflation rate was actually below 2%. And so all of a sudden, there was euphoria in financial markets. Wait a minute, inflation's at 2% over these last six months?

If we get another six months like this, that means that the 12-month inflation rate that everybody pays attention to will be at the Fed's goal. That was where the market was, and some Fed officials were beginning to say, hey, this is looking, you know, Austin Goolsbee, a Fed president in Chicago, calls it the golden path.

And boy, it sure looked like we were on the golden path at the end of last year and at the beginning of this year. The golden path to a so-called soft landing. A soft landing is when the Fed raises interest rates to keep inflation in check or to bring inflation down, but achieves it without a big deterioration in the labor market, without an increase, a substantial increase in the unemployment rate. And, you know, very, very unusual, very rare, exceedingly difficult to pull off. You need a lot of things to go your way.

You need good luck. And at the end of last year, it looked like the Fed was getting lucky. And that, what does that good luck translate into in terms of Fed action? So it was looking as if the Fed this year might be able to preemptively take back some of the interest rate increases they had made. So if you're, you know, looking to buy a house, do you want to have a 7.5% mortgage rate or a 6.5% mortgage rate? Of course, you'd prefer the 6.5% mortgage rate. If you're a company and you have a three-year note coming due and you borrowed that when interest rates were very low and now interest

rates are much higher, you know, that's a potential pain point. Okay, so that was the end of last year. The words you've used are nirvana, euphoria, golden path. And then 2024 happens. What does the economy start to look like? eye. There's no way to sugarcoat it. It was a high inflation report. And sometimes at the beginning of the year, businesses reset prices. There's a known seasonal effect. You think of it, okay, it's a new year. We're going to have a new price. Restaurants change their menu prices. Insurance companies might adjust their premiums, but you do it at the beginning of the year. So maybe you see an outsized increase, especially after a couple of years now of higher inflation. If businesses are trying to catch up, then maybe they do it at the beginning of the year. So initially there was some, all right, let's not overreact to this one month. It's just one month. The Fed had always said that they expected there to be bumps. So there are some bumps in the road. Then we get the February number, and it wasn't as bad as January, but it wasn't a good number.

But there was still hope that inflation would improve. In his State of the Union address in March, President Biden sounded optimistic. Wages keep going up. Inflation keeps coming down. Inflation has dropped from 9% to 3%, the lowest in the world and tending lower. The landing is and will be soft. And then the March number comes out last week. Some bad news on the economy

with new inflation numbers coming in hot. The latest Consumer Price Index report shows inflation is running hotter than expected. Inflation rose by more than expected in March by 0.4% and it's up 3.5% since this time last year. Inflation is higher than expected because housing has been higher and because services have been higher, and because services have been higher. It's in hospital prices, car insurance, rents, and those are things that are a little bit more difficult sometimes to have them come down quickly. It wasn't a terrible report, but the March inflation report didn't

make you more confident that inflation was coming down. It made you less confident. Why was that significant? March was significant because to the extent that Fed policymakers underreacted to January and February, they were primed to overreact to March. And it wasn't just March, of course. It was now three months. Maybe it's still a bumpy path, you could say, but it looks like these are bigger bumps than you were expecting.

Coming up, what these bigger bumps could mean for interest rates. We'll see you next time. Uber Reserve. Good things come to those who plan ahead. Family vacay? Reserve your ride as soon as you book your flights. To all the planners, now you can reserve your Uber ride up to 90 days in advance. See Uber app for details. Wherever you're going, you better believe American Express will be right there with you. Heading for adventure? We'll help you breeze through security. Meeting friends a world away? You can use your travel credit. Squeezing every drop out of the last day? How about a 4 p.m. late checkout?

Just need a nice place to settle in? Enjoy your room upgrade. Wherever you go, we'll go together. That's the powerful backing of American Express. Visit amex.ca slash yamx. Benefits vary by card. Terms apply. What does this inflation data say about the state of the economy? Well, that's a great question. I think a lot of people are still trying to work that out. The inflation data says that inflation isn't as big of a problem as it was a year ago,

but it's not going as quickly as we were hoping back to the Fed's goal. It says that, you know, the economy's been doing well. There were concerns earlier this year that the job market might slow down. The job market's not slowing down. There were concerns that consumers might pull back on spending. Consumer spending's been solid. So if you were worried about a recession earlier this year, you're not worrying about that right now, or you really don't have reason to be as worried about it. So if the economy is good, what does that mean for the Fed's plan

to cut rates? Because the economy does not appear to be weakening, you know, there's no reason for the Fed to cut interest rates on that front. So it really meant that the whole reason for cutting interest rates was going to be that inflation was getting better. And these numbers said, well, inflation's not getting better. Is there still a chance for rate cuts this year? You're resetting the clock now. You would need to see several more months of better behaved inflation to get the confidence that you were looking for. So, you know, now we're looking at unless the economy

slows unexpectedly sharply, you get the first rate cut. Maybe it's at the end of the summer. sharply, you get the first rate cut. Maybe it's at the end of the summer. Maybe it's at the end of the year. Maybe it's next year. You're going to have to wait a little bit longer. You know, when I go on a road trip and my kids ask, are we there yet? You know, the people in the backseat right now have been saying, are we there yet? Are we there yet? And the Fed's been saying, yeah, maybe, maybe, maybe we'll get off at the next exit. And now it's kind of like, you know what, we're going to be driving for a little bit longer. But if we start to see inflation keep ticking up, is there a risk that there could be rate hikes? You obviously can't rule out the idea of interest rate hikes. Now, when Powell spoke yesterday, he was not putting them back on the table.

If higher inflation does persist, we can maintain the current level of restriction for as long as needed. But there's this view that interest rates will just stay at a high level for longer, that you'll, you know, whenever you thought you were going to get the cuts, well, if inflation doesn't come down, we'll just hang out here for longer. It's not the end of the world for the Fed, and it's not the end of the world for the economy, but I think it does illustrate just how tricky it is

to pull off the soft landing. Did Powell talk about that directly, a soft landing? No, he did not. And he's been kind of superstitious and, you know, he'll even talk about achieving it, but he won't say soft landing. He'll just describe what a soft landing is. If the Fed doesn't cut rates this year, what will that mean for the economy? I mean, one argument is that what's the big deal? If the economy is growing well, the unemployment rate is below 4%, and it's been below 4% for longer than any period of time in the last 50 years.

What's not to like about that? If inflation keeps coming down and wage growth is above inflation, that means your after-inflation wages are rising. So there's one scenario here where it's just not a problem that interest rates are higher for longer because the economy's doing well. It's a concern more if you were to see some sort of abrupt or unexpected slowdown, and then the Fed has to decide, well, should we react to that? Or do we need to stay a little bit tighter here with interest rates because inflation is still above our target? And to be clear, the ideal, the nirvana, the euphoria is to get inflation down without causing a massive recession. Yes, that is the goal.

without causing a massive recession. Yes, that is the goal. Right? So it may be harder for people who want to buy houses. They may be facing, you know, elevated mortgage rates. But the target is a pretty good economy for most Americans and not a recession and massive unemployment. Yeah, the question is to break the back of inflation, do people need to lose their jobs?

The Fed chair is never going to say people need to be thrown out of their jobs to get inflation down. But when he's saying the sorts of things he was saying at this time last year, that there's likely to be some pain, it's sort of an acknowledgement that that may happen, that that may be the side effect of all these interest rate increases. He stopped saying that

at some point in the second half of last year. And that was because the labor market looked less overheated. Wage growth was coming down. And so people began to say, hey, maybe there is a way to get this last mile of inflation without having some, you know, serious economic downturn. And the last mile of a marathon can be really long. It can be, but it's also technically the same, you know, it's the same distance as the other mile before it and before that. It feels long. It feels long. At the end of last year, it looked like maybe the last mile wouldn't be that hard. And I think what the inflation report

last week said was, you know, maybe the last mile will be hard. Yeah. Maybe it's more than a mile. You know, let's mix our metaphors. Maybe this is a soft landing, but we went to the wrong airport. Oh, no. We went to the wrong airport. Okay. We had to refuel. It was a refueling stop. Should we go back to the kids in the car

and you're like, oh, when are we going to get there? Sorry, we have to stop at the rest stop. I got to get my metaphors aligned here. Next time, Nick. Next time. There will be a next time. There's always a next time.

Thanks so much. That's all for today, Wednesday, April 17th. The Journal is a co-production of Spotify and The Wall Street Journal. If you like our show, follow us on Spotify or wherever you get your podcasts. We're out every weekday afternoon. Thanks for listening. See you tomorrow.