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

Published

2 years ago

February 12, 2024

admin

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.

Stay up on the very latest with Evening Update.

Please provide a valid email address.

By clicking above you agree to the Terms of Use and Privacy Policy.

Never miss a story.

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.

Politics

Reeves fighting claims she ‘lied’ about deficit – as Starmer set to back her budget

Published

1 hour ago

November 30, 2025

admin

Reeves fighting claims she 'lied' about deficit - as Starmer set to back her budget

Rachel Reeves is fighting claims that she “lied” to the public about the state of the finances in the run-up to last Wednesday’s budget – in which she raised £26bn in taxes.

It follows a letter published by the Office for Budget Responsibility (OBR), the official watchdog which draws up forecasts for the Treasury, published on Friday.

In it, OBR chair Richard Hughes (who is already under fire for the leak of the budget measures) said he’d taken the unusual step of revealing the forecasts it had submitted to Rachel Reeves in the 10 weeks before the budget, and which is normally shrouded in secrecy.

The letter reveals this timeline, which has plunged the chancellor into trouble:

17 September – first forecast

At this point, it was already known that the UK’s growth forecast would be downgraded. The chancellor was told that the “increases in real wages and inflation” would offset the impact of the downgrade. The deficit forecast by the end of the parliament was £2.5bn.

20 October – second forecast

By this point, that deficit had turned into a small surplus of £2.1bn – i.e. the productivity downgrade has been wiped out and “both of the government’s fiscal targets were on course to be met”.

31 October – third forecast

The final one before the Treasury put forward its measures. The finances were now net positive with a £4.2bn surplus.

But the accusation is that Rachel Reeves was presenting an entirely different picture – that she had a significant black hole which needed to be filled.

13 October

Ms Reeves tells Sky’s deputy political editor Sam Coates the productivity downgrade has been challenging but added: “I won’t duck those challenges. Of course we’re looking at tax and spending.”

👉 Click here to listen to Electoral Dysfunction on your podcast app 👈

27 October

With the Treasury now aware the deficit had been wiped out, the Financial Times was briefed about a “£20bn hit to public finances.”

4 November

Ms Reeves gave a dawn news conference in Downing Street, setting the stage for tax rises. She says she wants people “to understand the circumstances we are facing… productivity performance is weaker than previously thought”, adding that “we will all have to contribute”.

10 November

Ms Reeves tells BBC 5Live that sticking to Labour’s promises not to raise taxes would require “things like deep cuts in capital spending”. The stage seemed set for the nuclear option – the first income tax rise in decades.

13 November

After headlines about a plot to oust Prime Minister Sir Keir Starmer, the Financial Times reported that the chancellor had dropped plans to raise income tax because of improved forecasts [which we now know hadn’t changed since 31 October], putting the black hole closer to £20bn than £30bn.

The prime minister’s spokesperson has insisted Ms Reeves did not mislead voters and set out her choices, and the reasons for them, at the budget.

But the issue has had enormous cut-through, with newspapers giving it top billing.

The Sun’s Saturday front page headline – “Chancer of the Exchequer – fury at Reeves ‘lies’ over £30bn black hole” – will not have been pleasant reading for ministers.

She now has questions to answer about the chaotic run-up to the budget – of briefing and counter-briefing, which critics say now makes little sense.

Tory leader Kemi Badenoch said on Saturday: “We have learned that the chancellor misrepresented the OBR’s forecasts. She sold her ‘Benefits Street’ budget on a lie. Honesty matters… she has to go.”

Economist Paul Johnson, former director of the respected Institute for Fiscal Studies (IFS), told The Times the chancellor’s 4 November news briefing “probably was misleading. It was clearly intended to have an impact and confirm what independent forecasters like [the National Institute of Economic and Social Research] and the IFS had been saying”.

“It was designed to confirm a narrative that there was a fiscal hole that needed to be filled with significant tax rises. In fact, as she knew at the time, no such hole existed.”

Read more on budget fallout:
Reeves accused over forecasts
Hospitality ‘needs a lifeline’

Ms Reeves is doing a round of morning interviews on Sunday in which she’ll be grilled over which of her budget measures will generate economic growth (which the government claimed was its number one priority), why they have been unable to tackle rising welfare spending and now about why markets and voters were left confused by dire warnings.

She may claim that she never personally said there was a specific £30bn black hole or that the extra headroom generated by the tax rises will ensure she does not have to come back for more next year.

In an interview with The Saturday’s Guardian, Ms Reeves said she had “chosen to protect public spending” on schools and hospitals in the budget.

She confirmed an income tax rise had been looked at, and insisted that OBR forecasts “move around” after the Treasury has submitted its planned measures. There are plenty more questions to come.

Meanwhile, Sir Keir will use a speech on Monday to support Ms Reeves’ budget decisions and set out his long-term growth plans.

He will praise the budget for bearing down on the cost of living, ensuring economic stability through greater headroom, lower inflation and a commitment to fiscal rules, and protecting investment and public services.

Sir Keir will say “economic growth is beating the forecasts”, but that the government must go “further and faster” to encourage it.

Politics

Lammy says justice reforms will reduce victims’ suffering – as right to jury trial set to go in some cases

Published

1 hour ago

November 30, 2025

admin

Lammy says justice reforms will reduce victims' suffering - as right to jury trial set to go in some cases

Victims will be put “front and centre” in reforms to be announced this week, the justice secretary has said, amid reports jury trials will be scrapped in some cases.

Sky News understands ministers have already been briefed on the changes, which would see a judge decide most cases on their own except for murder, rape or manslaughter – or those in the “public interest”.

The Ministry of Justice (MoJ) said the reforms would speed up justice and save victims from “years of torment and delay”.

Nearly 80,000 cases are currently waiting to be heard in crown courts, but a bid to limit the right to jury trial is likely to be divisive.

Shadow justice secretary Robert Jenrick said Mr Lammy should “pull his finger out” to cut the backlog rather than “depriving British citizens of ancient liberties”.

“The right to be tried by our peers has existed for more than 800 years – it is not to be casually discarded when the spreadsheets turn red,” said Mr Jenrick.

Full details are expected in the coming days, but in a statement today Mr Lammy said he had “inherited a courts emergency; a justice system pushed to the brink”.

“We will not allow victims to suffer the way they did under the last government, we must put victims front and centre of the justice system,” he added.

Mr Lammy said thousands of lives were on hold due to the case backlog, a “rape victim being told their case won’t come before a court until 2029. A mother who has lost a child at the hands of a dangerous driver, waiting to see justice done”.

He said he wanted a system that “finally gives brave survivors the justice they deserve”.

.However, it’s been reported Mr Lammy will go further than a review conducted by Sir Brian Leveson.

The retired judge backed the move for juries only in the most serious cases, but also proposed some lesser offences could go to a new intermediate court where a judge would be joined by two lay magistrates.

The Times said Mr Lammy had suggested in an internal memo he would remove the lay element from many serious offences that carry sentences of up to five years.

There are fears such a move could increase miscarriages of justice and racial discrimination.

Speaking to Sky News’ Politics Hub programme this week, work and pensions secretary Pat McFadden did not deny the changes were on the way.

The MoJ has laid the ground for the reforms by saying the court backlog could hit 100,000 by 2028 under the current system.

It said just 3% of cases are currently decided by a jury, with more than 90% already dealt with by magistrates alone.

Politics

Your Party votes to be led by members rather than single MP – avoiding Corbyn-Sultana battle

Published

3 hours ago

November 30, 2025

admin

Your Party votes to be led by members rather than single MP - avoiding Corbyn-Sultana battle

Your Party will be led by its members rather than a single MP, avoiding a battle between its two co-founders, Jeremy Corbyn and Zarah Sultana.

Members have voted for a collective leadership model rather than a single leadership model, by a margin of 51.6% to 48.4%.

There was a big cheer as the result was announced to delegates gathered in Liverpool for the new movement’s annual founding conference.

Your Party has been marred by factionalism between the two figureheads and had a single leadership model been picked, a big battle for the top job was expected.

But many members told Sky News at the conference that because of the squabbling, they want Your Party to be led by the people rather than “personality icons”.

Collective leadership will see ordinary members who are not MPs elected to senior positions on a Central Executive Committee (CEC), which will decide on party strategy and organisation.

Three key leadership roles will be the Chair, Vice Chair, and Spokesperson, who will be elected by February.

However MPs could become de-facto leaders, as they will be able to sit in the public office holder section of the executive committee.

They must be elected in a one on one vote, with four positions understood to be available.

A Your Party spokesperson said: “This vote shows that we really are doing politics differently: from the bottom-up, not the top-down.

“In Westminster, we have a professional political class increasingly disconnected from ordinary people, serving corporations and billionaires instead of the communities they are supposed to represent.

“With a truly member-led party, we will offer something different: democratic, grassroots, accountable.”

However one ally of Jeremy Corbyn told Sky News: “People have voted against utilising the biggest asset the party had – Jeremy.”

Your Party members have also voted to allow membership of other parties. Current rules don’t permit dual membership, but this sparked a major row on the eve of conference as it emerged figures from the Socialist Workers Party (SWP) had been expelled.

Ms Sultana, who supports dual membership, branded this a “witch hunt” orchestrated by “nameless bureaucrats” close to Mr Corbyn and refused to enter the conference hall on day one.

This breaking news story is being updated and more details will be published shortly.

Please refresh the page for the latest version.

You can receive breaking news alerts on a smartphone or tablet via the Sky News app. You can also follow us on WhatsApp and subscribe to our YouTube channel to keep up with the latest news.