Fed Chairman Jay Powell's political conundrum grows more difficult with each new week of 2024.
The year began with markets almost certain that a rate cut campaign would begin in March. But a combination of surprises in terms of upward inflation and signs that the economy remains resilient has now completely turned those expectations upside down.
The latest sign came Friday when the Labor Department said the producer price index, which tracks the prices companies pay to make goods and services, rose more than expected from December to January.
The debate has now shifted to whether the Fed will start cutting rates in June or postpone the rate cuts until after the summer.
A later schedule does not necessarily change Mr. Powell's fundamental mission to avoid both a recession and a resurgence in inflation. But this puts the Fed chair in direct conflict with the 2024 political season.
Atlanta Fed President Rafael Bostic said Thursday he doesn't expect any rate cuts until the third quarter, a period that includes major political conventions and ends about five weeks before Election Day. . In an interview with CNBC on Friday, he was a little more specific: “It's daylight savings time.”
Top political figures on both sides of the aisle have already indicated they are willing to sway Mr. Powell.
The most notable candidate is the Republican front-runner. Donald Trump appears to be an enemy of Powell, saying recently that he “looks like he's trying to lower interest rates to get people elected.”
Dealing with political forces has long been part of the Fed's mission, said Mark Spindell, chief investment officer at Potomac River Capital and a Federal Reserve historian.
“That's Jay's job,” he said. He added that the central bank's own credibility, or “the credibility of the Fed,” is “what's really at stake here.”
Mr. Powell's challenge will be navigating the forces of an election season, including the unpredictable Mr. Trump, who attacked Mr. Powell after appointing him to his current position in 2017.
“President Trump's MO is to destroy the Fed's credibility,” Spindel said.
“We don't consider politics in our decisions,” Powell said in a recent appearance on “60 Minutes.”
economic argument
The argument for postponing cuts until 2024 is driven by a steady stream of economic data.
The year began with news that the U.S. economy added 216,000 jobs in December. This showed the resilience of the labor market and was perhaps just the first sign that the Fed's rate cutting schedule doesn't necessarily have to be tight.
The case for a delay was strengthened on January 11 when higher-than-expected inflation figures were announced, showing that efforts to control prices remain.
This pattern continued through the first seven weeks of 2024. Signs that the economy remains strong have emerged, along with a second round of high inflation readings, further cementing the Fed's cautious approach to rate cuts in 2024.
especially inflation data raised a question About how easy it will actually be to drive prices up to the “last mile” of the Fed's 2% target.
The uncertainty was exacerbated this week by fresh comments from Fed officials following the release of the Consumer Price Index (CPI), which revealed that the index rose more than economists expected in January. was also emphasized.
“The January report on consumer product index inflation is a reminder that the path back to 2% inflation could be rocky,” Fed Vice Chairman for Supervision Michael Barr said Wednesday. “I let him do it,” he said.
Bostic, a voting member of the Fed's rate-setting committee, said on Thursday that he was “not yet comfortable” with the relentless decline in inflation, adding, “Even if the January CPI report is in line with expectations. Even so, that may be the case for some time to come.” It's abnormal. ”
A more dovish response came from Chicago Fed President Austan Goolsby, who said Wednesday that beating expectations for consumer prices does not mean the central bank cannot cut interest rates in 2024. This allayed market concerns.
“Let's not get excited that the CPI for the month was higher than expected,” Goolsby said.
The latest formal assessment by Fed officials, a report known as the Summary of Economic Projections (SEP), currently predicts three rate cuts this year, although it is not clear when they will begin. Officials plan to update their assessment at their next policy meeting in March.
politics, politics, politics
And as if the economic picture wasn't complicated enough, Mr. Powell and his Fed colleagues are bracing for even more political pressure as the year progresses. Trump is expected to lead the charge.
In a recent interview on FOX Business, he called Powell, the likely Republican nominee, “political” and said he thought the chairman would “probably do something to help the Democrats.”
Mr. Powell is unlikely to face overt public pressure from President Joe Biden. The current White House holder has sought to avoid speaking publicly about monetary policy during his term.
But Biden's allies may disagree. If the Fed can pull off a so-called soft landing (lower inflation without a recession), it could be a boon for Democrats, who have struggled to get their economic message across.
Some progressives like Elizabeth Warren have already publicly pressed Powell to cut rates, citing housing costs.
“This is going to be a tough year for the Fed,” Claudia Sahm, founder of Sahm Consulting, predicted in a live interview with Yahoo Finance on Tuesday. “They already understand it in every way.”
Mr. Powell has repeatedly promised to cut through the noise, citing his bipartisan record at the Fed as evidence he can do that.
Mr. Powell, a Republican, was first appointed to the board by a Democrat (Barack Obama), promoted to chairman by a Republican (Trump), and then moved to head the central bank by another Democrat (Biden). asked to stay.
Both Sahm and Spindell expect Powell to act apolitical in the coming months because steering the economy is sufficiently challenging.
“I think he has very good political sense, so I think he's the right person for this job,” Spindel said.
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