Fed rate cuts to be hard this year? … Inflation target 2%

Fed rate cuts to be hard?… Inflation target 2%

"Fed needs to be confident of reaching its 2% Inflation target."

For the U.S. Federal Reserve to cut interest rates, it first needs to have strong confidence in reaching and maintaining its 2% inflation target. Over the past year, inflation has been falling steadily, but not enough to reach the target, and the economy is showing signs of improvement.

The question for the Fed is.

1. If it cuts rates too soon, it will fail to reach its 2% inflation target and potentially cause high inflation to become entrenched.
2. If they cut rates too late, high-interest rates could push the economy into recession.

Fed Chairman Jerome Powell's comments echo that concern.

“Reducing policy restraint too soon or too much could result in a reversal of progress we have seen in inflation and ultimately require even tighter policy to get inflation back to 2%.”, “At the same time, reducing policy restraint too late or too little could unduly weaken economic activity and employment.”

Fed Interest rate cuts to be hard this year?

Federal Funds Effective rate; FRED

Historically speaking, the federal funds rate has increased most steeply over the past year or two.

If you look at the trend of low interest rates in the 1950s → high interest rates in the 1980s → low interest rates in the 2010s, it makes you wonder if our future will also be characterized by high interest rates.

Core PCE; ex. food and energy; FRED

Core PCE inflation (YoY), which excludes food and energy prices, reached 2.8% in January. While it has stabilized a lot over the past year, it will still take some time to reach 2%.

It's probably premature to talk about a rate cut by the US Federal Reserve.

What the Fed needs is a softening economy with lower inflation, stronger confidence in maintaining its inflation target, and a weaker job market.

The Bank of Canada left its policy rate unchanged at 5.0% in March 2024 for the fifth consecutive time.

We will publish a separate post if we see anything unusual in the press release.

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