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

Published

2 years ago

February 12, 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.

Technology

CNBC Daily Open: Record high U.S. stocks as investors rotate out of tech

Published

4 hours ago

December 12, 2025

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CNBC Daily Open: Record high U.S. stocks as investors rotate out of tech

Traders work on the floor of the New York Stock Exchange on Dec. 11, 2025, in New York City.

Spencer Platt | Getty Images

The S&P 500 and Dow Jones Industrial Average advanced on Thursday, with both hitting fresh closing records. The Russell 2000 index also ended the session at a new high, following the U.S. Federal Reserve’s quarter-point cut on Wednesday.

But if investors analyze Thursday’s individual stock movements, they will see not all is well with the AI play yet. Oracle shares plunged nearly 11%, a day after it reported weak quarterly revenue, higher capital expenditure and long-term lease commitments. Oracle’s slide dragged down AI-related names such as Nvidia and Micron.

In extended trading, Broadcom shares fell 4.5%. The chipmaker beat Wall Street’s expectations for earnings and revenue, but CEO Hock Tan appeared to have failed to address worries that their largest customer, Google, might eventually make more of its chips in-house. Rising memory prices would also pressure margins, while the company’s chip deal with OpenAI might not be binding.

That’s why the tech-heavy Nasdaq Composite fell 0.26% despite other major U.S. indexes hitting records. Putting the two together, that means investors are rotating out of tech into other parts of the market. The S&P 500 financials sector, for instance, closed at a fresh record, buoyed by jumps in Visa and Mastercard.

Even though the AI theme seems to be under scrutiny, other sectors are performing well on the back of a resilient U.S. economy — as signaled by Fed officials on Wednesday — and buoyed by interest-rate cut. So long as nothing throws a spanner in the works, looks like we’re all set for a happy holiday season.

— CNBC’s Kristina Partsinevelos contributed to this report.

What you need to know today

New records for U.S. stocks. The S&P 500 and Dow Jones Industrial Average notched fresh highs on Thursday, but the Nasdaq Composite, weighed down by Oracle, underperformed and fell. Asia-Pacific markets advanced Friday, with several major indexes rising at least 1%.

Broadcom’s fourth-quarter results beat expectations. The chipmaker also saw its net income nearly double from a year ago, and revealed that Anthropic is its $10 billion customer. But shares slumped in extended trading.

Disney to invest $1 billion in OpenAI. The media giant will also allow Sora, OpenAI’s video generator, to use its copyrighted characters, under a $1 billion licensing agreement. “We think this is a good investment for the company,” Disney CEO Bob Iger told CNBC.

Reddit launches legal challenge in Australia. The county introduced a ban on social media for teens under 16, which came into effect on Wednesday. Reddit argues that the law is “invalid on the basis of the implied freedom of political communication.”

[PRO] Where will Oracle go from here? Analysts are re-looking their price targets for Oracle stock after the firm released a disappointing and confusing earnings report on Wednesday.

And finally…

Gen. David Petraeus, Former CIA Director, Fmr. Central Commander and American commander in Iraq.

Adam Jeffery | CNBC

Trump scared Europe with his national security strategy. That’s no bad thing, ex-CIA chief says

White House’s new national security strategy gave Europe a scare last week as it warned the region faced “civilizational erasure” and questioned whether it could remain a geopolitical partner for America.

The strategy was, “in a way, going after the Europeans but, frankly, some of the Europeans needed to be gotten after because I watched as four different presidents tried to exhort the Europeans to do more for their own defense and now that’s actually happening,” David Petraeus, former CIA director and four-star U.S. Army general, told CNBC’s Dan Murphy in Abu Dhabi on Thursday.

— Holly Ellyatt

Business

UK economy shrank by 0.1% in October, official figures show

Published

6 hours ago

December 12, 2025

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UK economy shrank by 0.1% in October, official figures show

The UK economy contracted by 0.1% in October, according to official figures.

The surprise fall in gross domestic product (GDP) – a measure of economic output – comes after a similar unexpected 0.1% drop in September and 0% growth in August.

Economists polled by the Reuters news agency had predicted that October GDP would grow by 0.1%.

The figures, from the Office for National Statistics (ONS), represent more bad news for the chancellor over the state of the UK economy.

Commentators had warned that consumer spending was likely to be restrained in the run-up to November’s budget, amid concerns about the impact of Rachel Reeves’s potential measures on households and businesses.

UK GDP has also been hit hard by disruption to car production caused by a cyber attack on Jaguar Land Rover.

The ONS said that during October, the UK’s services sector fell by 0.3%, while construction was down 0.6%. However, production grew by 1.1%.

It found that GDP on a rolling three-month basis, to October, also fell by 0.1%.

The ONS’s director of economic statistics, Liz McKeown, said: “Within production, there was continued weakness in car manufacturing, with the industry only making a slight recovery in October from the substantial fall in output seen in the previous month.

“Overall services showed no growth in the latest three months, continuing the recent trend of slowing in this sector. There were falls in wholesale and scientific research, offset by growth in rental and leasing and retail.”

Interest rate cut ‘nailed on’

Commentators also blamed rumours and leaks in the run-up to the budget for dampening demand.

Scott Gardner, from banking giant JP Morgan, said that despite expectations of a return to growth, the economy continued to “battle a period of inconsistent productivity”.

He added: “Speculation about potential budget announcements had a numbing effect on consumers and businesses in the lead up to the chancellor’s speech at the end of November.”

Suren Thiru, from the Institute of Chartered Accountants, said the data increased the likelihood of the Bank of England cutting interest rates next week.

He said: “With these downbeat figures likely to further fuel fears among rate-setters over the health of the UK economy, a December policy loosening looks nailed on, particularly given the likely deflationary impact of the budget.”

Figures ‘extremely concerning’

Barret Kupelian, chief economist at PwC, said that while some of the blame could be attributed to the Jaguar Land Rover cyber attack, “the bigger story is that speculation around the autumn budget kept households and businesses in wait-and-see mode”.

He added: “Given the timing of the budget, November’s GDP print is likely to look similarly subdued before any post-budget effects start to show up.”

Sir Mel Stride, the Tory shadow chancellor, described the figures as “extremely concerning”, claiming they were “a direct result of Labour’s economic mismanagement”.

A Treasury spokesperson said: “We are determined to defy the forecasts on growth and create good jobs, so everyone is better off, while also helping us invest in better public services.”

Politics

Left-wing Labour MPs split on Angela Rayner’s future amid leadership speculation

Published

6 hours ago

December 12, 2025

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Left-wing Labour MPs split on Angela Rayner's future amid leadership speculation

Left-wing Labour MPs are split on whether they would welcome an Angela Rayner leadership bid, as speculation continues over whether Sir Keir Starmer can survive.

Senior MPs on the left have told Sky News that the former deputy prime minister “only needs to push the button” and she would have the support to take out her old boss.

But others said it “won’t wash with the public”, given it was only a few months ago that she resigned in scandal over her tax affairs. She has also been accused of not doing enough for the left while she was in government.

Sir Keir has insisted he would face down any threat to his leadership, while Ms Rayner’s allies say she has no plan to oust him.

But many MPs have said privately – if not publicly – that a challenge to his position appears increasingly inevitable given the state of the polls.

One MP in the socialist campaign group (SCG) said “all Angela needs to do is push the button” and MPs would get behind her – citing her popularity with the Labour membership.

Another MP said: “I think she would have a healthy number of people who would back her.”

Ms Rayner, a former trade union rep, was elected by members to be deputy Labour leader in 2020. She was a longstanding member of Jeremy Corbyn’s shadow cabinet and is revered by many of her colleagues on the left for her rise from a working-class background to the top of British politics, having left school at 16, pregnant, and with no qualifications.

However one MP said while they personally “rate her a lot” she “could have done more” for the left while in government.

“Ange was the deputy leader for a long time. I have to say she went to ground for a long time and didn’t speak up. Whether she has the support of MPs or the country I don’t know.”

This view was echoed by another colleague, who said she is “complicit” in the government’s failures.

This MP, in a traditional red wall seat, said the “visceral dislike of Starmer is baked in” and they have never experienced anything like the anti-Labour sentiment they are hearing on the doorstep.

They said any change of leader would have to be an outsider with a radical vision “like 1945”. “It would have to be Andy”, they said, referring to the Greater Manchester metro mayor Andy Burnham.

‘Burnham is a no-brainer’

Many MPs on both the left and the so-called “soft-left” told Sky News he would be their preferred candidate, given he is not associated with the current government, he has a different vision for the country and is popular with the public.

Mr Burnham is not currently an MP but he has not ruled out standing if a seat became available.

“In a hypothetical universe where all the barriers are overcome then Burnham is a no-brainer,” said one MP from the 2024 intake.

Another MP supportive of a Burnham takeover said a Rayner return “won’t wash with the public” given she had to resign from the second most senior position in government for underpaying stamp duty in September. They said it also wouldn’t be credible for her to “suddenly” start criticising the direction of the Starmer government given she was so closely tied to it.

As another MP put it: “I’d be backing a candidate from the left of the party. Angela Rayner is not from the left of the party.”

Other runners and riders

Any challenger would need the public backing of 80 colleagues to trigger a leadership contest. May is seen as crunch date if the local elections go as badly as predicted.

Other names that have come up include Health Secretary Wes Streeting and Home Secretary Shabana Mahmood. Mr Streeting is seen as a charismatic communicator who could take on Nigel Farage and Zack Polanski, while MPs within the “blue Labour” caucus are impressed with Ms Mahmood’s hard line on immigration.

But MPs on the left feel this would only offer a temporary boost in the polls as the pair are both seen as being on the centre-right, and a change of leader would be pointless without a change of direction.

Another name that has come up is the former Labour leader Ed Miliband, but while he is more to the left he has been rejected by the public once – having lost the 2015 election.

‘No active plot’

The MPs who spoke to Sky News stressed there was no active plot, but rather a general consensus that it is looking increasingly likely Sir Keir won’t be able to turn things around.

MPs who disagree with the prime minister’s politics said they are surprised at how personally disliked he is on the doorstep as he is ultimately a “nice man”.

They fear he has lost the trust of the public by saying one thing and doing another, with the winter fuel fiasco still coming up in areas where Reform UK is making gains.

As one MP put it: “We want him [Sir Keir] to do well and do better… but you can’t go on forever if things look terrible in the opinion polls.”

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‘Budget has sparked a sea-change’

MPs have recently revived the soft-left tribune group with the aim of influencing the government to take more of a progressive direction.

Ms Rayner addressed this group on Tuesday night, along with new deputy leader Lucy Powell and cabinet ministers Mr Miliband and Lisa Nandy.

One MP who spoke to Ms Rayner said she has “absolutely no plans” to launch a leadership bid “unless she is keeping it quiet”. They added that the subject of a leadership challenge didn’t come up in any of the speeches and there was an “upbeat atmosphere” following the lifting of the two-child benefit cap.

“The budget has landed well with the party,” they said. “[The meeting] felt like a sea change.”

As deputy prime minister and housing secretary, Ms Rayner introduced the Employment Rights Bill within 100 days and pushed through reforms to renters rights, the leasehold system and further devolution. She is also said to have played a crucial role in persuading Sir Keir to water down welfare cuts in the face of a major backbench rebellion.

A source close to her defended her record, saying she is “not interested in pacts and plots” and wants the government to succeed. They said she is not finished in politics but “she’s no one’s pawn, she’s her own person”.

Ms Rayner resigned after an ethics investigation found she acted in good faith, but broke the ministerial code by failing to get the correct tax advice after purchasing a flat in Brighton. She referred herself to HMRC and an investigation is ongoing.

Sir Keir has said he wants her back in cabinet, a view echoed by many senior colleagues.