By Michael Walden*
In a widely anticipated move, the Federal Reserve announced on Sept. 18, 2024, that it was cutting its benchmark interest rate by half a percentage point to a range of 4.75% to 5% – the first time the cost of borrowing has been lowered in four years.
The move marks an important pivot point, signaling that central bankers believe they have finally won their battle against inflation. It is also significant in timing, coming just months before the U.S. heads to the polls in a tight election that could turn on how Americans feel the economy is going.
The Conversation U.S. spoke with Mike Walden, distinguished professor emeritus at North Carolina State University, about what the rate cut means for the U.S. economy – and possibly the presidential campaign.
What does the Fed rate cut suggest about the state of the economy?
The Federal Reserve has two mandates: to pin inflation to around its target of 2% and to keep unemployment low. And the central bank balances that twin mandate when looking at whether to raise or lower base rates, or keep them the same.
For some time now, policymakers have concentrated on trying to get inflation under control through a series of interest rate hikes that took the Fed’s benchmark or base rate from a range of 0% to 0.25% in early 2022 to 5.25% to 5.5% in September 2024.
I believe what motivated them to drop the rate by a half-point now – rather than the quarter-point that some were expecting – is the labor market. The labor market is not exactly shaky – unemployment is currently at 4.2% – but it isn’t as robust as it was.
The latest job numbers were a little below expectations. And some economists are saying that there is a recession ahead. Indeed, there are some that are saying the U.S. is already in a recession.
So my guess is the majority of the Fed’s rate-setting board were convinced more by the latest unemployment data than inflation. In terms of the dual mandate, the Fed clearly feels it’s got the inflation fight in the bag, so it has turned to its second concern of keeping unemployment low.
So is this the soft landing the Fed was hoping for?
I would say so, yes. We are now in a soft landing – and I forecast the U.S. economy to slow but avoid a recession.
If I am right, then that is an achievement of Fed policy. A soft landing is very unusual – I can think of only one other occasion when it has occurred since the end of World War II. That was in mid-1995. And the story goes that then-Fed chairman Alan Greenspan, during his daily soak in a tub for a bad back, became worried about the prospect of significantly higher prices. He proceeded to convince the Fed board to raise rates, which it did – a move that headed off a potential recession.
What impact will the rate cut have?
The first thing to note is that this will not mean we are returning back to 2019 prices – that would take wage cuts and deflation. This will merely slow inflation, or the rate at which prices rise.
But it will have an impact. In the first hour after the decision was made, stock markets jumped on the news – so investors were clearly happy – though the major indices ended the day lower.
Investment markets tend to anticipate any expected change, so we have already seen some lowering of mortgage rates – which have been trending down in the run-up to the Fed decision. Credit card interest rates have been trending down, too.
So the markets were clearly expecting a Fed rate cut. But we should see further drops in mortgage rates because the Fed has hinted at more interest rate cuts to come.
Is there a danger that some observers will see this as a political move?
I’m sure a lot of people will read this as Fed Chairman Jay Powell helping the Democrats by cutting rates before the election.
But this is an economic-driven decision. There is no evidence that this has anything to do with the election.
What does history tell us about rate cuts and elections?
I think most serious observers know that the Fed is independent and makes decisions based purely on what is best for the economy. In fact, over the past 50 years, you will only find one period when eyebrows were raised. That was during the Nixon administration.
Under Fed Chairman Arthur Burns, the central bank was accused of pumping money in the the system and cutting rates to make things look prosperous in advance of the 1972 election. But it later all blew up when the U.S. headed into a period of double-digit inflation.
Aside from that, you will be hard-pressed to find real evidence of interference. In fact, since then, presidential candidates from both parties have complained about the Fed.
Nonetheless, could the rate cut play into the election campaign?
In terms of how Americans feel about the economy? Not really. I don’t think mortgage rates will drop much more. And although the news is encouraging for borrowers, there is another side of rate cuts: They are negative for some types of investors. Money market investors, for example, will not look upon the Fed move so fondly.
But that doesn’t mean the two presidential tickets won’t try to turn the news to their benefit.
Democrats will happily take any credit for getting inflation back down on their watch and will point out how it will help Americans with home loans – avoiding the fact that they don’t actually have any role in the rate decisions themselves.
Meanwhile, Republicans might well say: “Hey, the Fed dropped rates because the economy is worse than we thought. And a half-point cut means they are desperate, the economy is horrible and we are heading for recession because of the Biden administration’s policies.”
*Michael Walden, Professor and Extension Economist, North Carolina State University.
This article is republished from The Conversation under a Creative Commons license. Read the original article.
2 Comments
"I think most serious observers know that the Fed is independent and makes decisions based purely on what is best for the economy. In fact, over the past 50 years, you will only find one period when eyebrows were raised. That was during the Nixon administration."
Seriously - what on earth is this guy smoking?
There wouldn't be a single year in that half-century where anyone who understands the sleight of hand of central banking and money creation, wouldn't be shocked with the Fed's outrageous serial pump-and-dump behaviour.
The Fed is 100% privately owned - and yet Walden labels this crazy model "independent"?
https://wallstreetonparade.com/2024/08/new-study-says-the-fed-is-captur…
Pam Martens makes these observations...
"Based on our analysis over three decades of research, the Fed has been captured by the Wall Street megabanks. But is it possible that both our premise and that of Dr. Webster could be simultaneously correct? If Wall Street has also captured key components of the Executive Branch and the U.S. Congress, then there is actually no conflict between these premises.
Let’s start off with some basic facts that are not in dispute.
The Federal Reserve Board of Governors is defined as “an independent agency” of the federal government. However, what makes up the Federal Reserve System is both the Board of Governors and 12 regional Fed banks that are private corporations. These 12 regional Fed banks are, literally, owned by shareholders which are the member banks in the respective 12 Fed districts."
..............................................
Furthermore, the dual mandate claim is complete poppy-cock, because the CPI, inflation, and unemployment figures are all total fantasy. In reality, the Fed operates without any meaningful mandate, they haven't been audited for more than 70 years, and they regulate themselves.
https://www.propublica.org/article/secret-tapes-hint-at-turmoil-in-new-…
...quoted...
"While Jamie Dimon was serving as Chairman and CEO of JPMorgan Chase, and his bank was under investigation by the New York Fed for losing $6.2 billion of depositors’ money by gambling in derivatives in London, Dimon was sitting on the New York Fed’s Board of Directors.)"
https://marketsanity.com/john-williams-shadow-stats-us-economy-is-trapp…
During this 40+ minute interview, John Williams of Shadow Stats talks about how the real inflation rate is still well above 3% (Shadow Stats has it around 10% still) and how the jobs reports are more fake than usual because of the upcoming election.
The Fed is 100% owned by a privately owned banking cartel. In the case of the New York Fed, which is the single biggest money spigot on the planet, just two shareholders Citigroup and J P Morgan own more than 70% of the shares between them.
The Fed is most certainly not independent - furthermore, it makes decisions on what is best for it's kleptocratic ownership - it doesn't give a flying toss about the economy - it's intent is to keep a giant Ponzi scheme going so that they can continue to game the system at the expense of the the real economy.
This ridiculous model is one of the root causes of why the US economy has been hollowed out into an outrageous example of parasitic financial capitalism. The first $1 trillion of public debt took almost 200 years to accumulate - it now takes a mere 100 days to add $1 trillion to the current $35 trillion.
However, that number (which works out at around 123% of GDP), is small-fry when you start looking at the CEIC figures for total debt (this includes ALL DEBT and unfunded liabilities) - last time I checked the figure was well over 600% of GDP.
That figure is mindnumbing enough as it stands (BTW NZ's is over 600% too), but when you look at the massive amount of fictitious GDP included in the calculation, the real situation is even worse.
Both nominal and PPP, GDP figures, are utterly misleading because they include all sorts of items that are not product at all. For example, the financial sector's interest charges are treated as a product - in reality, they are simply a transfer payment from the real economy into the financial sector.
There are countless examples of financial charges like like credit card companies charging 19-30% interest - this is snuck in too, to help fudge the numbers. Likewise, CEOs and banksters such as GS's (Goldman Sachs) Steve Mnuchin (Trump's Secretary of the Treasury 2017-2020) and their massive salary packages and chicanery...
https://www.democracynow.org/2019/10/15/aaron_gantz_steve_mnuchin_housi…
... quoted from the link...
"Mnuchin’s bank was even “subsidized by us, the taxpayers,” for kicking people out of their homes. “He struck a deal with the federal government where the federal government actually paid him when he foreclosed on families to mitigate his losses. We paid him, his group, more than $1 billion.”
... end quote...
Goldman Sachs is a notorious loan shark corporation that operates on a sovereign and global level. Just like 'Super Mario', another GS tool - the unelected Italian PM from Feb 2021 to October 2022, and of course as President of the European Central Bank 2011-2019.
If you measure 'productivity' (sic) by these banskter's massive salaries they must be the most productive people on earth. But much of this carryp-on is not product, it is casino activity - often straight-out theft - this is monopoly rent that is fictitiously treated as 'product', rather than as a transfer payment from consumers (the real economy) to the monopolies - case in point, with the global casino and their thieving habits.
When I say 'theft', that's precisely what I mean - GS (AKA Goldman 'Sucks') were caught red-handed looting billions of dollars from Malaysia's Sovereign wealth fund.
Citigroup and JPMC - the two largest shareholders in the NY Fed...
https://wallstreetonparade.com/2024/08/all-the-devils-from-2008-are-bac…
... quoted...
"Citigroup, blew itself up back in 2008 and received the largest bailouts in global banking history.
By March of 2009, its stock was trading at 99 cents. By July 2010, it had received $2.5 trillion in secret revolving loans from the Fed over the span of 2-1/2 years, according to the 2011 audit of the Fed’s emergency bailout programs that was released by the Government Accountability Office.
Today, JPMorgan Chase is creating unfathomable risk transfer vehicles and placing them off its balance sheet. What could possibly go wrong?
In January, Anat Admati, Professor of Finance and Economics at Stanford Graduate School of Business, and German economist Martin Hellwig, released an updated and expanded version of their 2013 book The Bankers’ New Clothes: What’s Wrong with Banking and What to Do about It. In it, the authors write:
“Some of the risks that make JPMorgan Chase dangerous cannot actually be seen by looking at its balance sheet because the positions that give rise to them are not included there. These are risks from business units that JPMorgan Chase might own in part or that it sponsors, and to which it has provided guarantees to serve as a backstop if they should have funding problems.
These units might be full-flown subsidiaries, or they might be mere ‘letterhead firms,’ vehicles without any drivers, that are established for legal or tax reasons only. The bank’s commitments to these units amount to almost a trillion dollars, but these potential liabilities of the bank are left off the bank’s balance sheet. Yet they are quite relevant to the financial health of JPMorgan Chase.”
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.