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Fed begin rate cut discussions

The Federal Reserve is beginning discussions about potential interest rate cuts, but it is not expected to immediately set the stage for a rate reduction. Federal Reserve Chairman Jerome Powell and other officials have not signaled any plans to use their upcoming meetings to prepare for a rate cut. San Francisco Fed President Mary Daly has mentioned that it is ‘premature’ to consider interest rate cuts, emphasizing the need for more evidence that inflation is consistently moving back towards the 2% target.

  • Morgan Stanley’s chief US economist, Ellen Zentner, expects the first rate cut to occur in June, suggesting that the Fed can afford to be patient. This sentiment is supported by the fact that the Fed will not be cutting rates to counteract a recession but rather to adjust policy in response to a significant drop in inflation.
  • Fed Governor Christopher Waller has indicated that with economic activity and labor markets in good shape and inflation declining gradually, there is no need to move as quickly or cut as rapidly as in the past.
  • This view is reinforced by stronger-than-expected retail sales data from December, which has led traders to see a less than even chance of a rate cut happening soon.
  • Atlanta Fed President Raphael Bostic has expressed a desire to avoid rapid policy changes, suggesting that the central bank may delay a rate reduction until May. However, once the Fed decides to cut rates, it could move quickly according to economist Claudia Sahm, a former Fed staffer.
  • Federal Reserve Bank of Chicago President Austan Goolsbee has stated that officials should consider cutting interest rates as inflation falls to avoid overly restrictive monetary policy, but he also emphasized that decisions will be made on a meeting-by-meeting basis.
  • Overall, while the Fed is open to the idea of rate cuts as inflation cools, the central bank is proceeding cautiously and is not expected to initiate rate cuts immediately. The timing and pace of any future rate cuts will depend on the trajectory of inflation and economic data.

What is the impact of fed rate cuts on the economy?

Fed rate cuts can have several impacts on the economy:

  1. Stimulating economic growth: Lower interest rates can encourage borrowing and investing, leading to increased economic activity.
  2. Impact on stock and bond markets: Interest rates and the stock market have a relatively indirect relationship, with the two tending to move in opposite directions. When the Fed cuts interest rates, stock prices could rise, but share prices may have already rallied in expectation of rate cuts, potentially limiting any further increases.
  3. Inflation: Lower interest rates can help keep inflation-adjusted borrowing costs from rising, as a steady slowdown in price increases would raise inflation-adjusted interest rates.
  4. Recessions: Lower interest rates can contribute to the end of recessions by making borrowing money cheaper, which can entice people to start spending again.
  5. Consumer spending: Lower interest rates can lead to increased consumer spending, as borrowing becomes cheaper.
  6. Business expansion: Lower interest rates can help sustain business expansion, as borrowing costs are reduced.

However, there are also potential risks associated with lower interest rates, such as a decline in US savings rates, which are near their highest levels this century3. Additionally, the Fed’s decision to cut interest rates could be seen as a signal that the economy is headed for a recession, but this may not always be the case

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