Federal Reserve officials have begun contemplating cutting interest rates for the first time in the post-pandemic period as their focus shifts from surging inflation to a steadily weakening job market.
The Federal Open Market Committee began its two-day meeting Tuesday amid mounting signs that economic growth, while still on seemingly stable footing, is slowing. At 4.1%, the unemployment rate is at its highest level since February 2018, though it is still historically low.
On Tuesday, the Bureau of Labor Statistics reported that while layoff activity remains subdued, the hiring rate in the economy has slowed to a level not seen since 2014. The percentage of unemployed workers who’ve gone without roles for 27 weeks or more has recently begun to surge, with about 1.5 million total workers now in that category.
Meanwhile, the Fed’s pressured inflation gauge hit 2.5% in June, the lowest reading since March and the third time it had hit that mark this year. The Fed’s official target is 2%.
In recent testimony to Congress, Fed Chair Jerome Powell acknowledged that central bank officials had started the clock on lowering rates, saying acting “too late or too little could unduly weaken economic activity and employment.”
The Federal Reserve helps set the interest rates that determine how much it costs consumers and businesses to borrow money for products and services.
For the past two years, it has sought to fight inflation by keeping interest rates elevated, in essence fighting fire with fire: By making borrowing more expensive, it has cooled demand in the economy and thus slowed the rate at which prices have increased.
Now, the Fed is signaling that the higher rates have done their job on the inflation front — and that keeping them aflame could lead to unnecessary damage to the rest of the economy.
Wall Street traders have signaled for weeks that a September rate cut is a virtual certainty, according to data from the financial services company CME Group.
But influential former Fed officials have begun calling for a more rapid timeline. Bill Dudley, a former New York Federal Reserve president, wrote this month that a rate cut should occur before September. In a Bloomberg News op-ed, Dudley said he had “changed his mind,” with unemployment creeping higher and with all but the wealthiest households having depleted their immediate post-pandemic financial cushions.
“Although it might already be too late to fend off a recession by cutting rates, dawdling now unnecessarily increases the risk,” Dudley wrote.
This week, Alan Blinder, a Fed vice chair in the Clinton administration, said in a Wall Street Journal op-ed that the time to cut is now.
“Why wait?” Blinder asked, declaring the two-year fight against pandemic-induced inflation over as “the economy seems to be simmering down.”
Cutting rates would only be a matter of heading off a negative economic outcome: Companies have signaled that there’s upside, too.
Sectors whose success is especially sensitive to interest rates and consumer credit, like the housing and automotive markets, have shown particular weakness — including signals from companies in those industries that they expect sales to ramp up again once interest rates begin to fall.
“There is now a higher probability of interest rate relief beginning in September,” said Dave Foulkes, CEO of Brunswick Corp., a boat-making specialist. While new cuts would most likely have only a minor impact on 2024 results because peak season will have passed, they’d be “a potential tailwind for 2025.”
The Fed will announce the results of the Open Market Committee meeting at 2 p.m. Wednesday.
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