News & Our Thinking

Ward Brown explains why the data on the economy and inflation is buying time for the Federal Reserve to proceed patiently with its stated intention to lower rates in 2024. That might mean a slower, more methodical pace to easing, but it’s important to remember the mistakes of the 1970s. Inflation can announce a dramatic return, rebounding more powerfully than before. Ultimately, the Fed’s more patient approach might not be such a bad thing if it keeps the elusive soft-landing scenario intact.

Transcript

Hello, I’m Ward Brown. This week in St. Louis, we’ve had an absolutely frigid few days followed by an ice storm and, as you can see today, a fog bank.

The unpredictable weather and unclear line of sight behind me is an apt metaphor for the current debate surrounding when and why the Federal Reserve might act on its recent pivot and start cutting interest rates. Assuming I don’t get snatched up by a werewolf, let’s take a look at the pros and cons of when that might occur.

Well, I made it. At this point, the message is clear that the Federal Reserve will be lowering rates at some point this year. The exact timing and specific number of cuts is less relevant than the message it creates and the impact they’ll have.

The Fed does not want to do a victory lap on inflation too soon. They’ve studied history and know the disaster that unfolded in the 1970s when then-Fed Chairman Arthur Burns declared the inflation threat over and lowered rates, only to be forced into reversing course and raising them again when inflation rebounded dramatically.

For now, the economy is buying time for the Fed to proceed patiently like it would like to. Recent data on the economy and labor market have gone from resilient to strengthening. The Atlanta Fed GDPNow Forecast for first quarter GDP growth is a blistering 4.2%. January employment figures were stronger than expected.

Home and retail sales have been better, too, so how much easing does the Fed really want to do under those circumstances?

Rates at their current levels are definitely restrictive and having a major impact on certain industries where the risk is more pronounced, like all the commercial real estate debt that needs to be refinanced over the next few years. Delinquency rates on the repayment of debt on, for instance, credit cards has also been creeping higher. It’s nothing too worrisome, but the trend is pretty clear.

Although the labor market’s in real solid shape, layoff announcements have been picking up a bit. There is also just the massive cost of interest on the national debt.

The US Treasury just announced that interest payments are now larger than the entire defense budget and will soon surpass the entire social security budget. It’s a real problem.

The Fed wants to get ahead of any trouble but do so without making policy too easy and re-sparking inflation. By most official data, inflation is clearly tracking in the right direction and moving towards the Fed’s 2% target. Let’s say you go looking for a new or used car right now. It’ll definitely be a better deal than it was a year ago, but not as good as it was three or four years ago.

Rent prices are finally moving lower, and consumers are pushing back against things like the higher cost of eating out. McDonald’s, for instance, recently alluded to better value as a priority this year.

Nonetheless, we all feel the higher prices of the last couple years, and we will again this year. We got our auto insurance renewal, and I started researching the going price for kidneys just to cover our two teenage drivers.

The Fed wants to thread the needle between loosening things up a bit without encouraging too much confidence and stoking excess demand for goods and services that ultimately lead to higher prices.

Again, barring a rapid change to current economic conditions, rates will be coming down but probably at a slower pace and to a higher level than is currently expected. That’s not such a bad thing and would be in keeping with the soft landing scenario that’s been so difficult to achieve.

Thanks very much for watching.

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