Key Summary
- Economists anticipate a potential rate cut in June, following indications from surveys and Federal Reserve Chair Jerome Powell’s statements.
- Powell emphasizes the importance of achieving a 2% inflation rate, with current inflation rates exceeding this target, particularly in housing and digital currency sectors.
- Concerns arise regarding the timing of rate cuts amidst strong job growth, which could either counter inflationary pressures or serve as a preemptive measure to sustain economic momentum.
- Prior to implementing rate cuts, the Fed must address high home prices and inflationary pressures from sectors like gas, medical care, and insurance, which could further elevate prices.
- The Fed’s decision on rate cuts hinges on factors such as the balance between supply and demand for homes, economic sentiment, and government budget bills, with multiple rate cuts anticipated in the upcoming months to tackle supply issues and bolster the economy.
Many economists believe a rate cut could come in June. This comes after a survey showed respondents believing the Federal Reserve will cut rates soon. Federal Reserve Chair Jerome Powell stated that a rate cut this year would be likely, but specifics about an exact time are unknown. However, jobs are being added, surpassing expectations, which can delay a rate cut.
On March 7, Fed Chair Jerome Powell stated that the central bank is close to the pieces needed to start rate cuts. The Federal Reserve is seeking a 2% inflation rate. Inflation right now is at a 2.4% headline and 2.8% underlying. On March 7, Powell also reiterated the importance of housing and digital currency.
If Powell goes ahead with rate cuts in June, should inflation reach the 2% target while the labor market is strong, it might become a balancing act for the Fed. One of two things can happen: there will be more inflationary pressures and reverse inflationary trends, or it can serve as a preemptive strike to protect current economic growth. Powell is seeking to keep the economy’s momentum. However, recent data shows that the labor market may be cooling, so Powell is holding off until more data supports rate cuts.
Before the Fed starts rate cuts, it should have a plan to address home prices. Average sale prices of homes and rent remain high, hurting income and keeping the inflation rate right above the 2% mark. Gas, medical care, and insurance are also keeping inflation elevated. Should they lower rates, people will be more likely to buy a home with current prices, causing demand for homes to gradually increase overtime, resulting in higher home prices and keeping inflation unchanged. Building homes is still expensive, so there needs to be a method in which supply will outpace the demand, leading to lower home prices.
Can supply outpace demand for homes? With rate cuts possibly starting in June, it depends if builders are more eager to build than consumers wanting to buy homes. This could be the overall sentiment, seeing that the labor market is cooling. Finding a job now is highly competitive. For example, with the government unable to pass budget bills, major U.S. contractors and other companies are holding off hiring.
Are current rates choking the economy? I argue that yes. As I am writing this article, on March 12, overall prices in the United States rose 0.4% in February compared to January, with gasoline costs being the main contributor, followed by shelter and energy. I believe that rate cuts in June will be necessary to start fixing the supply issue in the United States—the U.S. still needs more housing, more oil, better insurance rates, and better supply. These past couple of months have shown that demand has remained relatively the same for basic things like housing, food, energy, etc. Migration is also another thing that we have to consider; it’s rising fast in the U.S., whether illegal or legal migration. The United States needs housing, and with current rates, it is hard to keep up with supply.
The Federal Reserve needs to shift focus from trying to balance supply and demand. Demand has surpassed supply, and the only way to bring down prices in the United States is to outpace demand. I can argue that this is partly the reason why prices rose in February, there is not the supply needed to deal with continuous strong demand. There is also a good wave of young adults looking to get their life started. This means wanting to buy or rent a home/apartment, buying a car, etc. These are factors that will lead to an increase in prices if the Fed doesn’t focus on supply.
Backlog in budget bills in Congress is also an important factor. Government agencies, contractors, and businesses don’t know what to focus on if the government does not release its spending priorities so the public and private sectors can begin working on government priorities. Things like energy projects and housing projects will remain unfunded.
There is a lot that goes into determining what moves the Federal Reserve will make. It is a very difficult balancing act that people sometimes underestimate. However, the economy so far is looking good, with the U.S. indexes hitting record highs led by the AI boom. Confidence in the economy is increasing, but after today, there might be some skepticism about whether this momentum will keep going. Rate cuts this year are highly possible. In my opinion, we might see 2-4 rate cuts this year starting in June. After the first rate cut, I believe the Federal Reserve will wait and see how the economy reacts and proceed with additional rate cuts or leave rates unchanged.
NGF will continue to monitor the Federal Reserve. We will also monitor what the ECB does as well across the Atlantic.
Author: Aleksandros Spaho