{"id":11055,"date":"2023-12-03T19:04:13","date_gmt":"2023-12-03T19:04:13","guid":{"rendered":"https:\/\/connectwithfund.com\/economy\/some-experts-balk-at-talk-that-fed-must-cut-rates-soon-if-inflation-keeps-coming-down\/"},"modified":"2023-12-03T19:04:14","modified_gmt":"2023-12-03T19:04:14","slug":"some-experts-balk-at-talk-that-fed-must-cut-rates-soon-if-inflation-keeps-coming-down","status":"publish","type":"post","link":"https:\/\/connectwithfund.com\/?p=11055","title":{"rendered":"Some experts balk at talk that Fed must cut rates soon if inflation keeps coming down"},"content":{"rendered":"
\n

Over the summer months, as reporters and the markets were pondering how many more times the Federal Reserve would hike interest rates this year, New York Fed President John Williams mentioned one reason the central bank might actually start cutting rates in 2024.<\/p>\n

In an interview, Williams explained that, assuming inflation comes down, if the Fed doesn\u2019t cut interest rates at some point, then real \u2014 or adjusted-for-inflation \u2014 interest rates will go up and up and up.<\/p>\n

\n

Other Fed officials have chimed in with similar views. Minneapolis Fed President Neel Kashkari called it simple math.<\/p>\n

Turns out the market was listening. <\/p>\n

After last week\u2019s soft October consumer price inflation report, markets quickly came to believe there would be speedy cuts coming.<\/p>\n

Traders in derivative markets now see a big chance that the Fed\u2019s benchmark rate, now in an range of 5.25%-5.5%, will be a full percentage point lower by the end of next year, with the first cut coming in May.<\/p>\n

After almost hitting 5% in mid-October, the 10-year Treasury yield
\n BX:TMUBMUSD10Y
\n is down to 4.44%.<\/p>\n

Dovish commentators like Jeremy Siegel of the Wharton School are pushing the envelope further. Siegel said last week he thinks the Fed\u2019s battle against high inflation is just about over, and predicted the Fed could begin to cut interest rates as soon as March.<\/p>\n

The market has pushed aside routine comments from many Fed officials this fall that the Fed was going to need to keep its benchmark rates \u201chigher for longer\u201d to get inflation down. <\/p>\n

Asked if the recent market moves were based on this argument over real interest rates, Richard Moody, chief economist at Regional Financial replied: \u201cEither explicitly or implicitly.\u201d<\/p>\n

\u201cThe markets understand that that slowing inflation gives the Fed latitude to cut the fund rates,\u201d Moody said.<\/p>\n

The federal funds benchmark rate, adjusted for inflation, is now over 2%, Moody estimated. That\u2019s higher than before the 2008 financial crisis.<\/p>\n

Another way to look at it, Moody said, is that the top end of the Fed\u2019s benchmark rate is 5.5%. The Fed\u2019s estimate for a \u201cneutral rate\u201d is 2.5%, The neutral rate is the Fed\u2019s estimate for where rates should be if the economy is growing at 2% trend and inflation is running at 2%.<\/p>\n

But some experts are balking at the Fed\u2019s estimate for \u201creal\u201d rates.<\/p>\n

Adam Posen, president of the Peterson Institute for International Economics, said he had two problems with the real funds rate argument.<\/p>\n

First, some of the drag from higher rates is priced into the market, and expected.<\/p>\n

Secondly, he said the Fed\u2019s benchmark rate \u201cis not a sufficient statistic for monetary conditions. The fed funds rate is an inter-back lending rates. <\/p>\n

\u201cIn terms of the impact on the economy, what we care about is overall monetary and credit conditions. It is not clear that the real fed funds rate captures those changes,\u201d Posen said.<\/p>\n

\u201cThe last two decades have repeatedly taught us that what matters is credit conditions and liquidity in specific markets,\u201d he said, in a subsequent interview. Even financial-condition indices don\u2019t capture it.<\/p>\n

\u201cAs a result, people probably overestimate how much additional drag the U.S. economy will get if the real federal funds rate rises as a result of inflation,\u201d Posen said.<\/p>\n

Posen said he also rejected the idea that there is a natural or normal level of interest rates. \u201cWhether they\u2019re too tight or too loose depends on the conditions of the economy,\u201d he said.<\/p>\n

Posen said he still wants the Fed to raise rates one more time.<\/p>\n

\u201cI think since they\u2019re going to want to sit on the sidelines throughout this election cycle and with the productivity numbers not yet definitive, I\u2019d do one more hike before February,\u201d he said. He\u2019s referring to solid gains in productivity in the past two quarters that many economists think will allow the economy to grow without boosting inflation further.<\/p>\n

Steven Richhiuto, chief economist at Mizuho Americas, said passive tightening doesn\u2019t work.<\/p>\n

\u201cPeople are nominal\u201d and don\u2019t view the economy in an inflation-adjusted lens, he said.<\/p>\n

\u201cI think the Fed is on hold for now,\u201d he said, but he wouldn\u2019t say that the Fed is done hiking.<\/p>\n

\u201cI believe in higher for longer. I am definitely in the longer camp, but I\u2019m not willing to say that the higher is over,\u201d he said. <\/p>\n<\/p><\/div>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Over the summer months, as reporters and the markets were pondering how many more times the Federal Reserve would hike interest rates this year, New York Fed President John Williams mentioned one reason the central bank might actually start cutting rates in 2024. In an interview, Williams explained that, assuming inflation comes down, if the Fed doesn\u2019t cut interest rates at some point, then real \u2014 or adjusted-for-inflation \u2014 interest rates will go up and up and up. Other Fed officials have chimed in with similar views. Minneapolis Fed President Neel Kashkari called it simple math. Turns out the market<\/p>\n","protected":false},"author":1,"featured_media":11056,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[38],"tags":[],"class_list":["post-11055","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-economy"],"yoast_head":"\nSome experts balk at talk that Fed must cut rates soon if inflation keeps coming down | ConnectWithFund<\/title>\n<meta name=\"description\" content=\"Over the summer months, as reporters and the markets were pondering how many more times the Federal Reserve would hike interest rates this year, New York\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/connectwithfund.com\/?p=11055\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta 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