Source: Wall Street News
A rise in real interest rates adjusted for inflation will inhibit economic activity and may cause the Federal Reserve to cut interest rates early.
After inflation cooled down beyond expectations, real interest rates rose. How will this affect the prospects for the Federal Reserve to cut interest rates?
On January 28, local time, Wall Street Journal reporter Nick Timiraos, known as the “New Federal Reserve News Agency,” wrote that since this year, inflation has cooled down beyond expectations. If it falls to the Fed's 2% target, then real interest rates adjusted according to inflation will rise, which may limit economic activity.
Thus, this means that the Federal Reserve needs to boost the economy by cutting interest rates.
Some opinions warn that if we have to wait until economic data shows that the Federal Reserve is “too restrictive,” the interest rate cut at that point may be an urgent act to avoid a recession. A sign of crisis is that in the current high interest rate environment, the real estate industry is already very difficult.
Kansas City Federal Reserve Chairman Esther George said:
We have adopted a very aggressive austerity policy, and there is potential 'room' for interest rate cuts before interest rates return to a neutral range.
Economist Dario Perkins believes that compared to the Fed's concerns about its own credit, the greater risk is that cutting interest rates for too long will cause irreparable damage to the labor market. He stated:
As long as there is no such terrible phenomenon as stagflation in 1970, (the Federal Reserve) should be able to cut interest rates fairly quickly.
The lesson the past 12 months have taught us is that we actually don't have to suffer to reduce inflation to a reasonable level.
However, there are still opinions that it is still too early to cut interest rates.
Timiraos said in the article that policy makers currently want to cut interest rates carefully because “it is uncertain whether the recent trend of cooling inflation will continue and whether the economy will accelerate in an environment of high inflation.”
First, Dean Maki, chief economist at hedge fund Point72 Asset Management, believes that while declining inflation may increase real interest rates, it will also increase purchasing power, consumer confidence, and spending. He stated:
“When inflation falls, economic growth also increases... I can't think of any example of growth weakening after inflation falls in the past few decades.”
Second, the rising stock and bond market may weaken expectations to a certain extent that interest rates will be cut as soon as possible. William English, a professor at the Yale School of Management, said that for this reason, Federal Reserve officials may have to wait until May or even later to cut interest rates. However, English also mentioned that if officials get satisfactory inflation data and the real economy slows down, interest rates may also be cut in March.
Another reason is that once interest rates are raised again after cutting interest rates too early, it may affect the credit of the Federal Reserve. An official told Timiraos:
“We hope to avoid a situation where interest rates are cut and then raised at any cost.”
Maki also said that officials “tend to let the data tell them that their restrictions are too strict rather than relying on neutral estimates.”
Editor/Corrine