When will Americans see those interest-rate cuts?

Link:https://www.economist.com/finance-and-economics/2024/04/10/when-will-americans-see-those-interest-rate-cuts

In the wake of robust growth, this article says inflation is only looking stickier. For multiple months now, inflation has come in higher than forecasted and at this rate inflation at the end of the year will be hitting 4% rather than the Fed’s target 2%. Because of this the Fed is still not going to cut rates. The Fed not cutting rates will remain consistent with Powell’s approaches to the past and remain data-dependent before any decisions are made in terms of monetary policy. It will be interesting to see how the PCE, when it comes out, is interpreted. 

In terms of discussion that we’ve had in class about how politics can affect decisions made, I thought it was interesting that the article talked about how this might look for Biden with the election coming up. 

To perfectly sum up what this may mean for our near and distant future the article concluded with this quote: “The general conclusion today is that although growth has remained impressively strong, it now appears to be bumping up against the economy’s supply limits, and is therefore translating into persistent inflationary pressure. That calls for tight, not loose, monetary policy. The Fed, already cautious about cutting rates when inflation figures were more co-operative, is likely to be even more wary now.”

Soft Landing or No Landing? Fed’s Economic Picture Gets Complicated.

     In the article “Soft Landing or No Landing? Fed’s Economic Picture Gets Complicated” published in The New York Times by Jeanna Smialek, it delves into the topic of stubborn inflation and strong growth that could keep the Federal Reserve wary about interest rate cuts. 

    The article discusses unexpected economic trends in 2024, contrary to previous predictions of a "soft landing" marked by declining inflation and moderate growth. Instead, the economy is booming with prices rising more quickly than anticipated. This challenges the Federal Reserve's goal of controlling inflation at a steady 2 percent, potentially leading to prolonged high-interest rates. Recent data shows stubborn inflation, prompting caution among Fed officials about rate cuts. Despite initial expectations of three rate cuts in 2024, investors now anticipate fewer cuts, reflecting the economy's resilience. Fed Chair Jerome H. Powell emphasizes patience, citing strong growth, while some policymakers suggest no rate cuts at all this year.

This cautious approach may delay rate cuts until later in the year or even prompt a rate increase if inflation remains stagnant. The article highlights the potential impact on households and President Biden's political standing ahead of the 2024 election. Overall, it underscores the uncertainty surrounding future Fed policy and its implications for the economy.

Soft Landing or No Landing? Fed’s Economic Picture Gets Complicated. - The New York Times (nytimes.com)

Market Turbulence: Dow Dives and Treasury Yields Soar Amid Inflation Concerns

In a notable market event on April 9, 2024, the financial world witnessed significant volatility as stocks took a plunge following the release of March's inflation data, which came in stronger than many had anticipated. This unexpected rise in inflation figures has led to a reconsideration of the timing of anticipated interest rate cuts by the Federal Reserve, impacting investor sentiment and market dynamics.

The Numbers Speak Volumes

The Dow Jones Industrial Average faced a substantial decline, dropping 577 points or 1.5%, while both the S&P 500 and Nasdaq Composite saw decreases of 1.3% each. This downturn was not isolated to specific sectors; all major sectors within the S&P 500 painted the market red, with real estate experiencing the most significant loss at about 4%.

This market reaction comes on the heels of a strong first quarter for the year, where the S&P 500 rallied 10% for its best first-quarter gain in five years. The optimism was momentarily dampened as the Consumer Price Index (CPI) for March reported a 0.4% rise for the month and a 3.5% increase year-over-year, slightly above the forecasts. Similarly, the Core CPI, which excludes volatile food and energy prices, accelerated more than expected.

Fed Rate Cut Expectations Adjusted

The strong inflation data has led to a shift in expectations regarding the Federal Reserve's monetary policy moves. According to the CME FedWatch Tool, the likelihood of a rate cut at the Fed's June meeting has now diminished to just 20.6%. Market participants are recalibrating their bets, with many now anticipating that any potential rate cut could be delayed until the Fed's September meeting.

Treasury Yields on the Rise

The treasury yields, particularly the 10-year and 2-year yields, have responded to the inflation news with significant spikes. The 10-year Treasury yield surged back above 4.5%, while the 2-year yield approached nearly 5%. These movements underscore the market's anticipation of a more aggressive stance by the Federal Reserve to combat inflation, which remains stubbornly high.

Sectoral Impacts and Investor Sentiment

The impact of the inflation data and adjusted expectations for Federal Reserve policy was felt across various sectors. Financial stocks such as JPMorgan Chase and industrial giants like Honeywell saw declines, reflecting concerns over the impact of higher rates on economic growth. Technology stocks, a sector that had been on a hot streak, also experienced pullbacks, with giants like Microsoft and Apple each retreating by 1%.

 Looking Forward

Despite the day's downturn, market analysts and investors are keeping an eye on the broader picture. Many see this as a temporary adjustment rather than a signal of a longer-term bear market. The upcoming release of the Fed's meeting minutes and further inflation reports will be closely watched for indications of future policy directions and their implications for the markets.

As we navigate through these volatile times, the importance of monitoring inflation trends and Federal Reserve policy decisions remains paramount. The market's reaction to the latest inflation data serves as a reminder of the intricate balance between monetary policy, investor expectations, and the real economy.


Source - https://www.cnbc.com/2024/04/09/stock-market-today-live-updates.html

How to build a global currency

 The article discusses the evolution of the Indian rupee's international standing over the past decades, contrasting its historic presence in the global market with its current marginal role. Despite India's economic stature as the world's fifth-largest economy, the rupee accounts for less than 2% of international currency transactions. Prime Minister Narendra Modi has expressed a desire to elevate the rupee's global prominence, urging policymakers to enhance its accessibility. However, historical precedent suggests that while leaders often advocate for their currency's global recognition, enacting the necessary reforms remains a challenge.

The piece explores the potential benefits and challenges associated with establishing a currency's international prominence, drawing parallels with the experiences of other countries such as Japan and China. While India has taken strides to bolster the rupee's international appeal, notably through inclusion in global financial indices and facilitating foreign investment, significant barriers remain. The article suggests that achieving global currency status requires extensive economic reforms, akin to those undertaken by Japan in the past, which may entail considerable disruption to existing economic structures. Without internal impetus for change, the prospect of India's rupee ascending to global currency status remains uncertain, with the article underscoring the need for domestic initiative in driving such transformation.

https://www.economist.com/finance-and-economics/2024/04/04/how-to-build-a-global-currency

“The Fed and Political Independence: It’s Complicated”

This article discusses how Joseph Sternberg, who writes for the Wall Street Journal, thinks the Fed has created the worst inflation in over forty years through excessive tightening. He states that “the central bank could cast the economy into a recession for no good reason” and feels that the Fed should be held accountable similarly to elected officials. Sternberg believes that the Fed should be held politically responsible by having state governors appoint Fed regional bank boards (which then appoint the regional bank president) and empower “the US president to fire at will members of the Board of Governors.” Moreover, the article's author, Alexander William Salter,  agrees with Sternberg and believes that Congress should change the Fed’s mandate to focus solely on price stability. He states that the Fed should be required to target the price level or nominal GDP. The Fed can choose the metric, but it must stick with it, and its leaders must be accountable for hitting the target on an ongoing basis. The author believes that failure should result in punishment, up to and including dismissal, and that the Fed’s strategy of using interest paid on reserves to implement monetary policy gives it too much power. The Fed can arbitrarily increase its balance sheet, giving it control over credit allocation. Essentially, the Fed pays banks not to lend, incentivizing banks to keep more significant reserve balances in their Fed accounts. The author gives more instances to regulate the Fed and remove some of its power. 

https://www.aier.org/article/the-fed-and-political-independence-its-complicated/