The Fed hesitant to cut interest rates though inflation is nearly back to 2%

Published

1 year ago

February 9, 2024

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WASHINGTON (AP) From Wall Street traders to car dealers to home buyers, Americans are eager for the Federal Reserve to start cutting interest rates and lightening the heavy burden on borrowers.

The Fed is widely expected to do so this year probably several times. Inflation, as measured by its preferred gauge, rose in the second half of 2023 at an annual rate of about 2% the Fed’s target level. Yet this week, several central bank officials underscored that they werent ready to pull the trigger just yet.

Why, with inflation nearly conquered and the Fed’s key rate at a 22-year high, isn’t now the time to cut?

Most of the Fed’s policymakers have said they’re optimistic that even as the economy and the job market keep growing, inflation pressures will continue to cool. But they also caution that the economy appears so strong that there’s a real risk that price increases could spike again.

And some are worried that if they cut rates now and inflation re-accelerates, then the Fed could be forced into an about-face and have to raise rates again.

“History tells many stories of inflation head-fakes,” said Tom Barkin, president of the Federal Reserve Bank of Richmond, in a speech Thursday.

Inflation had seemed defeated in 1986, Barkin noted, when Paul Volcker was Fed chair.

The Fed reduced rates, but inflation then escalated again the following year, causing the Fed to reverse course,” he said.

“I would love to avoid that roller-coaster if we can, said, Barkin, who is among 12 Fed officials who vote on interest rate policy this year.

Several officials have said they want more time to see if inflation continues to subside. In the meantime, they note, the economy is solid enough that it can thrive without any rate cuts. Last month, for example, Americas employers delivered a burst of hiring, and the unemployment rate stayed at 3.7%.

Theyre going to be glacial, and take their time, said Steven Blitz, chief US economist at GlobalData TS Lombard. Theyre willing to say, We dont know, but we can afford to wait so were going to wait. “

The sturdiness of the economy has also raised questions about just how effective the Feds 11 rate hikes have been. If higher borrowing rates are only barely restraining the economy, some officials may conclude that high rates should stay in place longer or that few rate cuts will be needed.

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I dont feel theres a sense of urgency here, Loretta Mester, president of the Cleveland Federal Reserve, told reporters Tuesday. I think later this year, if things evolve as anticipated, we would be able to start moving the rate down.

Yet their caution carries risks. Right now, the economy appears on track for a soft landing,” in which inflation would be defeated without causing a recession or high unemployment. But the longer that borrowing rates stay high, the higher the risk that many companies and consumers would stop borrowing and spending, weakening the economy and potentially sending it into a recession.

High rates could also compound the struggles of banks that are saddled with bad commercial real estate loans, which would be harder to refinance at higher rates.

The high cost of borrowing has become a headache for David Kelleher’s Chrysler-Jeep dealership just outside of Philadelphia. Just 2 1/2 years ago, Kelleher recalled, his customers could get an auto loan below 3%. Now, they’re lucky to get 5.5%.

Customers who had monthly car lease payments of, say, $400 three years ago are finding that with vehicle prices much higher and interest rates up, their monthly payments would be closer to $650. The trend is pushing many of his customers toward lower-priced used cars or no purchase at all.

We need the government to address the interest rates … and understand that theyve accomplished their goal of lowering inflation,” Kelleher said. If interest rates can come down, I think were going to start selling more cars.

Kelleher is likely to get his wish by May or June, when most economists expect the Fed to start reducing its benchmark rate, which is now at about 5.4%. In December, all but two of the 19 policymakers that participate in the Fed’s policy discussions said they expect the central bank to cut rates this year. (Twelve of those 19 actually get to vote on rate policies each year.)

Yet economic growth has accelerated since then. In the final three months of last year, the economy expanded at an unexpectedly strong 3.3% annual rate. Surveys of manufacturers and service-providers, such as retailers, banks, and shippers, also reported that business perked up last month.

Collectively, the latest reports suggest that the economy may not be headed for a soft landing but rather what some economists call a no landing. By that they mean a scenario in which the economy would remain robust and inflation an ongoing threat, potentially stuck above the Fed’s target. Under this scenario, the Fed would feel compelled to keep rates at elevated levels for an extended period.

Powell said last week that while the Fed wants to see continued strong growth, a strong economy does threaten to send inflation up.

I think that is a risk … that inflation would accelerate, Powell said. I think the greater risk is that it would stabilize at a level meaningfully above 2%. … Thats why we keep our options open here and why were not rushing.”

Other officials this week drove home the point that the Fed is trying to balance the risk of cutting rates too soon which might cause inflation to surge again and keeping rates too high for too long, which could trigger a recession.

At some point, the continued cooling of inflation and labor markets may make it appropriate to reduce rates, Andrea Kugler, a recently appointed Fed governor said Wednesday in her first public speech. On the other hand, if progress on disinflation stalls, it may be appropriate to hold the target range steady at its current level for longer.

Some analysts have pointed to signs that the economy is becoming more productive, or efficient, allowing it grow faster without necessarily increasing inflation. Yet productivity data is notoriously hard to measure, and any meaningful improvement wouldn’t necessarily become apparent for years.

Still, maybe the economy can take higher interest rates than we thought in 2019 before the pandemic, said Eric Swanson, an economist at the University of California, Irvine.

If so, that might not just delay the Fed’s rate cuts, but result in fewer of them. Fed officials are still saying they plan to cut rates perhaps three times this year, below the five or six that some market analysts foresee.

Business

At least 13 people may have taken their own lives linked to Post Office scandal, public inquiry finds

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2 hours ago

July 8, 2025

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At least 13 people may have taken their own lives linked to Post Office scandal, public inquiry finds

At least 13 people may have taken their own lives after being accused of wrongdoing based on evidence from the Horizon IT system that the Post Office and developers Fujitsu knew could be false, the public inquiry has found.

A further 59 people told the inquiry they considered ending their lives, 10 of whom tried on at least one occasion, while other postmasters and family members recount suffering from alcoholism and mental health disorders including anorexia and depression, family breakup, divorce, bankruptcy and personal abuse.

Follow latest on public inquiry into Post Office scandal

Writing in the first volume of the Post Office Horizon IT Inquiry report, chairman Sir Wyn Williams concludes that this enormous personal toll came despite senior employees at the Post Office knowing the Horizon IT system could produce accounts “which were illusory rather than real” even before it was rolled out to branches.

Sir Wyn said: “I am satisfied from the evidence that I have heard that a number of senior, and not so senior, employees of the Post Office knew or, at the very least, should have known that Legacy Horizon was capable of error… Yet, for all practical purposes, throughout the lifetime of Legacy Horizon, the Post Office maintained the fiction that its data was always accurate.”

Referring to the updated version of Horizon, known as Horizon Online, which also had “bugs errors and defects” that could create illusory accounts, he said: “I am satisfied that a number of employees of Fujitsu and the Post Office knew that this was so.”

The first volume of the report focuses on what Sir Wyn calls the “disastrous” impact of false accusations made against at least 1,000 postmasters, and the various redress schemes the Post Office and government has established since miscarriages of justice were identified and proven.

Recommendations regarding the conduct of senior management of the Post Office, Fujitsu and ministers will come in a subsequent report, but Sir Wyn is clear that unjust and flawed prosecutions were knowingly pursued.

“All of these people are properly to be regarded as victims of wholly unacceptable behaviour perpetrated by a number of individuals employed by and/or associated with the Post Office and Fujitsu from time to time and by the Post Office and Fujitsu as institutions,” he says.

What are the inquiry’s recommendations?

Calling for urgent action from government and the Post Office to ensure “full and fair compensation”, he makes 19 recommendations including:

• Government and the Post Office to agree a definition of “full and fair” compensation to be used when agreeing payouts
• Ending “unnecessarily adversarial attitude” to initial offers that have depressed the value of payouts, ⁠and ensuring consistency across all four compensation schemes
• The creation of a standing body to administer financial redress to people wronged by public bodies
• Compensation to be extended to close family members of those affected who have suffered “serious negative consequences”
• The Post Office, Fujitsu and government agreeing a programme for “restorative justice”, a process that brings together those that have suffered harm with those that have caused it

Regarding the human impact of the Post Office’s pursuit of postmasters, including its use of unique powers of prosecution, Sir Wyn writes: “I do not think it is easy to exaggerate the trauma which persons are likely to suffer when they are the subject of criminal investigation, prosecution, conviction and sentence.”

He says that even the process of being interviewed under caution by Post Office investigators “will have been troubling at best and harrowing at worst”.

‘Hostile and abusive behaviour’

The report finds that those wrongfully convicted were “subject to hostile and abusive behaviour” in their local communities, felt shame and embarrassment, with some feeling forced to move.

Detailing the impact on close family members of those prosecuted, Sir Wyn writes: “Wives, husbands, children and parents endured very significant suffering in the form of distress, worry and disruption to home life, in employment and education.

“In a number of cases, relationships with spouses broke down and ended in divorce or separation.

“In the most egregious cases, family members themselves suffered psychiatric illnesses or psychological problems and very significant financial losses… their suffering has been acute.”

The report includes 17 case studies of those affected by the scandal including some who have never spoken publicly before. They include Millie Castleton, daughter of Lee Castleton, one of the first postmasters prosecuted.

She told the inquiry how her family being “branded thieves and liars” affected her mental health, and contributed to a diagnosis of anorexia that forced her to drop out of university.

Her account concludes: “Even now as I go into my career, I still find it so incredibly hard to trust anyone, even subconsciously. I sabotage myself by not asking for help with anything.

“I’m trying hard to break this cycle but I’m 26 and am very conscious that I may never be able to fully commit to natural trust. But my family is still fighting. I’m still fighting, as are many hundreds involved in the Post Office trial.”

Business Secretary Jonathan Reynolds said the inquiry’s report “marks an important milestone for sub-postmasters and their families”.

He added that he was “committed to ensuring wronged sub-postmasters are given full, fair, and prompt redress”.

“The recommendations contained in Sir Wyn’s report require careful reflection, including on further action to complete the redress schemes,” Mr Reynolds said.

“Government will promptly respond to the recommendations in full in parliament.”

Business

Public finances in ‘relatively vulnerable position.’, OBR warns

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2 hours ago

July 8, 2025

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Public finances in 'relatively vulnerable position.', OBR warns

The UK’s public finances are in a “relatively vulnerable position”, the government’s official forecaster has warned.

The Office for Budget Responsibility (OBR) cited a drag from successive economic shocks, recent U-turns on spending cuts and higher-than-expected policy commitments.

It sounded alarm over the projected path for debt as a result, in its annual fiscal risks and sustainability report.

It saw total debt above 270% of gross domestic product (GDP) by the early 2070s – up from a current level of 96.5% – declaring that rising debts have led to “a substantial erosion of the UK’s capacity to respond to future shocks”.

Money latest: Amazon launches 24/7 grocery deliveries

The OBR’s report highlighted damage from the COVID pandemic and cost of living crisis that followed Russia’s invasion of Ukraine.

But it raised fears that past and current government policies were further harming the sustainability of the public finances.

The report said that the pension triple lock, for example, was now estimated to cost £15.5bn annually by 2029-30.

That was “around three times higher than initial expectations”, it said.

The lock, which rises each year in line with inflation, wage growth or 2.5% – whichever is higher – had risen by more than the 2.5% base in eight of the 13 years of operation to date, the report stated.

The watchdog said it reflected more volatile inflation than expected.

It also picked up on the latest government U-turns over planned welfare and winter fuel payment cuts in the face of rebellions by Labour MPs.

The decisions are expected to leave Chancellor Rachel Reeves facing a black hole of £6.75bn while weaker-than-expected economic growth could add a further £9bn to that sum in the run-up to the autumn budget, according to Sky News projections that see a void of around £20bn.

The OBR highlighted future risks from rising defence spending and the impact of climate change.

Public sector pay demands could also prove a drag, with resident doctors voting in favour of strikes over pay.

While ministers acknowledge damage to the public purse from the U-turns, Ms Reeves has repeatedly ruled out a new wave of borrowing to fund a spending spree.

As such, the government has not ruled out the prospect of some form of wealth tax to help meet its commitments despite the top 1% of earners contributing almost a third of all income tax already – on top of other targeted taxes such as capital gains.

The report said: “Efforts to put the UK’s public finances on a more sustainable footing have met with only limited and temporary success in recent years in the aftermath of the shocks, debt has also continued to rise and borrowing remained elevated because governments have reversed plans to consolidate the public finances.

“Planned tax rises have been reversed, and, more significantly, planned spending reductions have been abandoned.”

Shadow chancellor Mel Stride said of the report: “The OBR’s report lays bare the damage: Britain now has the third-highest deficit and the fourth-highest debt burden in Europe, with borrowing costs among the highest in the developed world.

“Under Rachel Reeves’ economic mismanagement and Keir Starmer’s weak leadership, our public finances have become dangerously exposed – vulnerable to future shocks, welfare spending rising unsustainably, taxes rising to record highs and crippling levels of debt interest.

“Labour’s recklessness risks it all – your pension, your job, your home, your savings.”

A Number 10 spokesman said: “We recognise the realities set out in the OBR’s report and we’re taking the decisions needed to provide stability to the public finances.”

World

‘Widespread sexual violence’ took place during Hamas’s 7 October attacks, report by Israeli experts says

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2 hours ago

July 8, 2025

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'Widespread sexual violence' took place during Hamas's 7 October attacks, report by Israeli experts says

A newly released report led by Israeli legal and gender experts presents detailed evidence alleging “widespread and systematic” sexual violence during the Hamas-led terror attack on 7 October.

Warning: This story contains descriptions of rape and sexual violence

The findings, published by the Dinah Project, argue that these acts amount to conflict-related sexual violence (CRSV), and assert that “Hamas used sexual violence as a tactical weapon of war”.

The report draws on 18 months of investigation and is based on survivor testimonies, eyewitness accounts, and interviews with first responders, morgue personnel and healthcare professionals.

According to the Dinah Project, the documented patterns – such as forced nudity, gang rapes, genital mutilation, and threats of forced marriage – indicate a deliberate and coordinated use of sexual violence by Hamas operatives during the attack.

Reported incidents span at least six locations, including the Nova music festival, and several kibbutzim in southern Israel.

One section of the report describes victims “found fully or partially naked from the waist down, with their hands tied behind their backs and/or to structures such as trees and poles, and shot”.

At the Nova music festival and surrounding areas, the investigators found “reasonable grounds to believe” that multiple women were raped or gang-raped before being killed.

The report’s findings are consistent with earlier investigations by the United Nations and the International Criminal Court (ICC).

The UN’s Special Representative on Sexual Violence in Conflict previously concluded that there were “reasonable grounds to believe” CRSV took place during the attack.

Significantly, the Dinah Project urges the international community to officially recognise the use of sexual violence by Hamas as a deliberate strategy of war and calls on the United Nations to add Hamas to its list of parties responsible for conflict-related sexual violence.

The nature and scale of sexual violence on 7 October have been a subject of intense controversy, with some accusing parties of weaponising the narrative for political ends.

This report seeks to confront what its authors call “denial, misinformation, and global silence,” and to provide justice for the victims.

Hamas has denied that its fighters have used sexual violence and mistreated female hostages.