Dive Brief:
- Federal Reserve Chairman Jerome Powell’s signaling yesterday that the overnight rate is likely to go down later this month gave the stock market a big lift, but whether the move is needed is another story, analysts told Banking Dive. Both the Nasdaq Composite and the S&P 500 surged yesterday after Powell’s testimony.
- “He really hasn’t said anything that he hasn’t been saying for months,” said Norbert Michel, director of the Center for Data Analysis at the Heritage Foundation. “They talk about all the downside risk. Those are always there. I don’t think there’s been that much of a change since the Fed’s last meeting.”
- “I don’t feel strongly that lowering rates is absolutely the right thing to do,” said Jeffrey Miron, director of undergraduate studies in economics at Harvard University and director of economic studies at the Cato Institute. “The data are certainly consistent with some slowing being in the offing, but the data are always noisy.”
Dive Insight:
On the other hand, there’s no reason for the Fed to wait to lower rates if it feels the economy is facing a slowdown, the analysts said.
That's because, despite strong employment, inflation remains low — even lower than the Fed’s target rate of 2%. That low rate gives the Fed leeway to be accommodative in its monetary stance even though rates are already at historic lows.
“It doesn’t matter where interest rates are,” said Michel. “If he [Powell] thinks the economy is slowing down he’s got to act. He can’t save bullets. That’s how you end up with no liquidity and a recession.”
Miron said there’s some dispute among economists whether the linkage between inflation and employment has really weakened, as Powell suggested in his testimony. But regardless of that, the main concern about inflation is that it’s too low, not that it’s too high.
One immediate concern right now, Miron said, is whether the Fed is getting too sensitive to what investors want. “The market has a temper tantrum whenever it seems like rates are going to keep going up and so the Fed is scared to raise rates,” he said. “It’s not clear that’s a good framework for monetary policy.”
Miron predicts the Fed will lower its short-term rate 25 basis points later this month when it meets.
