When will rates go down? The answer rests on conflicting economic data.
When will rates go down? The answer rests on conflicting economic data.
The latest economic data is sending conflicting signals: The number of layoffs rose slightly in February, and last week 221,000 people signed up for unemployment benefits — that’s 9,000 more than the week before. But on the bright side, the total number of people who were already on unemployment actually fell — and U.S. companies bumped up hiring and pay in March, according to ADP.
If it all sounds like a wash, it kind of is. But wash as it may be, this data figures into a set of monumental decisions: When will the Federal Reserve cut interest rates, how many times and by how much? Even Fed officials themselves don’t agree on specific answers.
Their foot is on the brakes of the economy right now, meaning that interest rates are high. They are making loans more expensive and driving up credit card delinquencies, but they’re also bringing down inflation. The question is when is that foot is going to ease up.
“We have time to let the incoming data guide our decisions on policy,” Fed Chair Jerome Powell said Wednesday at the Stanford Graduate School of Business.
Does the data show the economy slowing down too much? Better lay off the brakes. Does the data show inflation is staying too high? Slam that pedal and keep rates high.
One small problem with the economic data? It’s kind of a choose your own adventure at this point, said Bryan Whalen, chief investment officer at asset management firm TCW.
Consumer spending rose, but the service sector slowed down. More people laid off but also more hired. “Whatever narrative you want to support, there’s enough data out there to do it,” he said.
That extends right up to the Fed itself. “I think we have heard conflicting signals from Fed officials,” said Matthew Luzzetti, chief U.S. economist at Deutsche Bank.
At least one thinks rates should be slashed this year. A couple of others think they shouldn’t be touched at all.
“At this point, I think the bigger risk would be reducing the [federal] funds rate too early,” Cleveland Fed President Loretta Mester told the Cleveland Association for Business Economics on Tuesday, referring to the interest rate the Fed uses to influence rates across the economy.
Again it all comes down to the data — not the data we have, but the data we will get in the next few months. One piece in particular.
“I think the decision is mostly about the inflation data,” said David Mericle, the chief U.S. economist at Goldman Sachs.
The Fed wants annual inflation at 2%. In February, it was 2.5%, according to the personal consumption expenditures price index. It fell at the end of last year, then picked up at the beginning of this year. Mericle said it is coming back down.
“It comes down to whether or not the inflation numbers come in soft enough that Fed officials feel like we’re on track enough to keep moving enough towards 2% to get started” cutting rates, he said.
Mericle and everyone interviewed for this story, and the financial markets in general, expect interest rates to start coming down in June.
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