It is difficult to predict what will happen in 2024. But an easy way to gauge whether things will go well this year is to see if Mr. Powell becomes forgettable. The less he’s in the headlines or trending on TikTok, the better off the economy is probably.
One item remaining on Mr. Powell’s to-do list is lowering interest rates. There is no basis for interest rates to remain near 5.5%. Keeping them there is like putting the brakes on the economy. In order to control inflation, interest rates were intentionally raised to suppress consumption. Mr. Powell is honest about this. He mentioned “restrictive” interest rates nine times in a December press conference and said they needed to be maintained. “Until we are confident that inflation is on track to return to target.” This gives the Fed confidence. Inflation continues to trend downward. The desired inflation rate was 2.9% (annualized) in December, well within the target range. The Fed should recognize this and lower interest rates.
The biggest risk now is that the Fed will keep interest rates high this year, causing a recession. As Mr. Powell himself said in December, “You want to ease restrictions on the economy well before you get to 2%, or even before you get to 2% to prevent an overshoot.”
If “restrictive” was the Fed’s buzzword in 2023, it should be “normalizing” in 2024. Chairman Powell will not start cutting rates this week. But he could begin laying the groundwork for a rate cut at the next FOMC meeting in March.
Forget the debate about whether this is a “soft landing” or “no landing” scenario. The Fed could start sending a message this week that the economy is healthy and close to inflation and employment targets set by Congress. The Fed needs to lower interest rates enough to get the housing market moving again. This does not represent a huge reduction, but even more savings could be possible by bringing it back below 5%. Purchases and Projects.
Ideally, interest rates would be back below 5% by this summer. While Wall Street salivates at the prospect of further interest rate cuts, Powell says the Fed is at least not causing a recession, just allowing the economy to run largely on its own terms. It may be argued that.
The truth is that interest rates have not been normal for almost 20 years, even before the great financial crisis of 2007-2008. It’s hard to remember a time when the Fed wasn’t working furiously to prop up the economy and banking system with ultra-low interest rates, or trying to rein in inflation with high interest rates over the past year. Wall Street, many businesses, and consumers were addicted to “cheap money.” Already, people are eyeing the possibility of a rate cut as a sign that cheap money is coming back. Changing that narrative will be difficult. But if Mr. Powell can return interest rates to near-normal levels, it could be the biggest accomplishment of his Fed tenure.
There is also a strong argument that the start of interest rate cuts in March is politically related. This year’s economic downturn almost certainly means President Biden will not be re-elected. The Fed wants to maintain its independence from politics. The Fed’s influence on elections will be weakened if it starts cutting rates early and continues to do so through the end of the summer.
There is always the risk of a new pandemic, wider war in the Middle East, or other cruel surprises, but for now, the fear of major inflation has passed. And the job market is essentially back to where it was in 2019. (There are still more job seekers than job openings, but the gap has narrowed and wage growth has slowed.) Even in the face of shocks, as it did in March 2020 when the Powell Fed rescued the market, We have shown that we can act quickly when needed. , and when it adjusted interest rates in the summer of 2019 during President Donald Trump’s trade war.
Mr. Powell’s greatest gift to the nation is to avoid a recession in 2024 and return to boring Fed policy.