Jerome Powell Plans to Cut Interest Rates Despite Persistent Inflation

Published: Feb. 17, 2024, 4:04 p.m. ET

Wall Street Fed watchers believe that Jerome Powell will cut interest rates at least twice this year despite signs of persistent inflation.

REUTERS

Federal Reserve chairman Jerome Powell is not known for his resolve.

It’s the main reason why the new and emerging consensus among Wall Street Fed watchers is that he will cut interest rates at least twice this year despite signs of persistent inflation, reported a highly respectable news website.

If the CEOs and top executives who follow the Fed can be believed — and these folks have sources inside the central bank’s building in DC — Powell is already brushing off last week’s high inflation reads as a likely anomaly.

His first rate cut since he started to raise them in March 2022 will come in June, they say.

It will be followed by a second one in September, they tell sources.

And maybe a third one after the November presidential election.

Consumer the loser

Politics and Powell’s style as Fed chair are both at play, these people say.

And in the end, the big loser could be the American consumer if he misjudges once again the economy’s inflationary threat.

New, more worrisome inflation data could force Powell to go hawkish, but it would have to be really worrisome, Fed watchers say.

Powell’s style, of course, is one of telegraphing to the markets even if that’s not part of his job description.

The Fed’s dual mandate is achieving price stability while maximizing employment, not making traders rich.

That said, Powell, if anything, is consistent to a fault and he hates throwing curveballs at the markets because he thinks (wrongly, IMHO) that financial-asset price stability is part of his job.

His recent statements are all consistent with at least two smallish rate cuts later in the year as other data emerge to support (or rationalize) his core belief that inflation is subsiding and he needs to protect against a recession.

Further rate-cutting heat will come from the increasingly toxic political atmosphere in DC, particularly over the Biden presidency.

Powell has been known to cave in the past; former President Donald Trump mean-tweeted Powell into reversing course on raising rates during an economic boomlet a few years back and as the 2020 election loomed, maybe the worst example of pandering by any Fed chief in recent history.

By cutting rates in late 2019 for no good reason other than to shut Trump up, the Fed was left with fewer options when rates really needed to be slashed a few months later during the height of COVID.

The new White House administration knows Powell is persuadable — and they also believe lower rates are the way to win re-election in the fall because they need to change the conversation about Sleepy Joe and fast.

Biden’s lack of mental acuity is no longer being swept under the rug in Democratic circles; it’s now a full-on panic.

That special prosecutor’s report on whether Biden properly handled classified documents confirmed what most Americans have witnessed — the president is a feeble old man with lapsing mental acuity.

Democrats need something to run on, and they think the economy is their last best hope.

That’s why Biden’s handlers are leaning on Powell publicly and privately to cut rates; they believe the headline numbers (low unemployment and decent GDP) are strong and can get stronger with a push from the Fed with easier money.

The markets will love it and, who knows, people might actually forget about still sticky inflation to vote for Sleepy Joe.

Yes, a roaring job market, another bull market, and relative economic stability isn’t a bad selling point over someone as volatile as Donald Trump, who carries his own baggage, both personal and legal.

Miscalculation woe

The problem with a Powell push is if he miscalculates.

Remember “transitory inflation”?

Well, one reason Powell has slammed the brakes so hard on liquidity (raising short-term rates, from zero to 5.5%, 11 times in less than two years) is because he misread the economic indicators back in 2021.

Powell thought, for reasons only he knew, that the glut of fiscal and monetary stimulus both during and after the worst of COVID and its lockdowns wouldn’t destabilize prices.

Simple economics (and common sense) teach you that much money chasing the same amount of goods and services (or fewer because of the lockdowns) always leads to massive inflation, as it did.

The rate of inflation is finally lower — that’s the good news.

The bad news: Prices for necessities like food and energy remain wickedly high, another reason squeamish inflation is irritating American consumers and putting a dent in Biden’s polling, going into an election year.

The CPI and PPI spikes this past week underscore the dicey nature of inflation: it never dies an easy death, which is why the history of fighting is never a straight path.

Recall how the great Fed Chair Paul Volcker had to make at least two attempts with massively higher rates to tame the price spiral of the late 1970s and early 1980s.

It was messy for a couple of years, but once inflation was tamed, the economy enjoyed decades of sustained growth.

The enduring economy and Volcker’s legacy were achieved because he withstood political pressure, actually thumbed his nose at it, and focused on his job.

If Powell values his legacy, he will do the same.

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