Someone should let President Biden know that the Federal Reserve is not going to deliver him a politically expedient rate cut.
You will probably recall that the president said last month that while he couldn’t guarantee a cut in interest rates, he was willing to bet that Fed would cut rates.
“I can’t guarantee it. But I bet — you betcha — those rates come down more, because I bet you that that little outfit that sets interest rates, it’s going to come down,” Biden said in a March speech in Philadelphia.
If Donald Trump had spoken these words, the establishment media and economists would have howled in outrage at the violation of the alleged norm that the president is not suppose to even appear to put pressure on the central bank. But since it was Biden speaking the words, we heard none of those complaints. What counts as beyond the pale for Trump is quietly accepted for Biden.
As we pointed out back when Trump did publicly criticize the Fed—and the establishment press and punditry reacted with shock and horror—this is a rule more often broken than observed, especially when the Fed’s policy is tighter than the occupant of the White House thinks is appropriate. Sure there’s a shocking level of hypocrisy and dishonesty at work behind the different reactions from journalists and analysts, but that’s not exactly news to anyone.
The stronger-than-expected increase in the consumer price index (CPI) for March sent a lot of Wall Street analysts and economists back to their spreadsheets and whiteboards. The near universal predictions that the Fed would cut in June were now obviously wrong. At one point, nearly every single Wall Street economist was forecasting a June cut.
That’s all changed. The futures market now implies there will not be a cut until September—and even that is far from a certainty. The U.S. economics team at Bank of America, lead by Michael Gapen, swiftly pushed out their forecast for a cut from June to December—and warned that there are significant risks that rate cuts could start even later. The rest of Wall Street is sure to follow.
Not Biden. He’s sticking with his forecast that cuts are coming.
“Well, I do stand by my prediction that, before the year is out, there’ll be a rate cut,” Biden said Wednesday at a White House press conference.
You have to wonder if Japanese Prime Minister Fumio Kishida, who was standing nearby as Biden made his forecast, had to stifle a chuckle at Biden’s confidence on this. The politicians in Japan know better than to try to jaw bone central bankers into shaping monetary policy in politically convenient ways.
The Oval Office can be a very isolating place, so it is not clear if Biden understands just how much the inflation picture has changed. His economic advisers may not be delivering the cold facts in a language that the president can understand. Certainly he will not be learning much if he relies on, say, the writings of Paul Krugman, who as far as we know is still declaring that inflation was transitory after all.
Perhaps someone can smuggle a copy of Breitbart Business Digest to him. We’ve been pointing out for many months that inflation stopped falling sometime last year, right around the time the Fed stopped raising interest rates and began hinting that a rate cut was coming. This was not a coincidence. While rate cuts tighten monetary policy, holding rates steady while signaling lower rates are ahead are a form of easing. The army of economists employed by the Fed somehow have missed this.
If you spoke to a real estate agent or a mortgage broker sometime over the past nine months, you probably heard that it was a good time to buy a house even though mortgage rates were still high. The idea is that since rates would be coming down, you could refinance into a more affordable loan soon enough. If you waited until rates actually dropped, home prices would probably be rising, maybe pricing you out of the market.
The same logic works with business expansions. If businesses expect rate cuts, they are willing to finance projects at higher rates now because they anticipate refinancing at a lower rate. So, the expectation of lower rates makes the current rate less restrictive than it would otherwise be.
The facts about prices have not been friendly to the view that rate cuts are coming soon. Core inflation, as measured by the consumer price index (CPI), rose by 4.5 percent annualized in the first quarter, up from 3.3 percent at the end of last year. While the personal consumption expenditure price index has been running lower than CPI, largely because of a lower weighting for housing, it too has been on the rise. Based on what we saw in CPI Wednesday and the producer price index on Thursday, the three-month annualized PCE inflation rate is likely to be 3.9 percent or four percent when the March numbers get published later this month.
Even the most dovish members of the Federal Open Market Committee are not going to start cutting when inflation has been rising and running at twice the target. That’s especially true when unemployment has been running below the Fed’s longer-run expectation for years. What’s the urgency to cut when we haven’t had unemployment this low for this long since we were drafting young men and sending them to fight the communists in Southeast Asia?
Biden desperately wants the Fed to cut because high interest rates are undermining his re-election pitch. A rate cut would signal a victory over inflation, a victory that Biden has declared several times only to be humiliated by a resurgence in price pressures. What’s more, lower rates would potentially boost the affordability of homes and cars and appliances, perhaps coaxing the public into taking a less damning view of Biden’s management of the economy.
The timing is not working out for Biden. Even if the Fed were to determine that it might be able to cut as early as September—unlikely given the strength of inflation going into the second quarter—Fed Chair Jerome Powell’s obligation to preserve the credibility of the Fed’s stance of being above politics is likely to rule out implementing the first cut on the eve of the election. Nothing much would be lost by simply waiting until after the election, and a lot would be risked by not waiting. Biden’s public bet that the Fed will cut may even be hurting the chances of a cut because it risks creating the impression that the change would be made at the president’s behest.
As we’ve said before, there’s a non-zero chance that the Fed’s next move is a rate increase. And the odds of a hike keep getting higher.
“While it is not my baseline outlook, I continue to see the risk that at a future meeting we may need to increase the policy rate further should progress on inflation stall or even reverse,” Fed Governor Michelle Bowman said in a speech this week.
There’s no cut coming before the election. Biden’s insistence that there is only makes him appear more out of touch with reality.
