Cogito Ergo Non Serviam
Fed Cuts Rates 25 BP
Yesterday, the Federal Reserve cut US interest rates by 25 basis points. The Fed Funds rate range is now 3.75-4%. The cut is an attempt by the Fed to strengthen the labor market, the very same labor market it was so desperate to break with its hikes. It should help, but at the same time, lower rates are inflationary. The Fed wants inflation at 2%, and currently, the US is at 3%. It is more likely to reach 4% than 2% now. The Fed will have to thread the needle quite deftly, but there is reason to believe it will get it wrong. Without government statistics, the Fed is flying blind. Without the government re-opening, there will be no new government data. This is unlikely to end well.
Investopedia noted, "The decision was not unanimous, with two Fed governors dissenting from the other 10 voters in opposite directions. Stephen Miran, President Donald Trump's appointee to the Fed's governing board, voted to lower rates more steeply, by half a percentage point, while Jeffrey Schmid, president of the Kansas City Fed, preferred to hold the rate steady."
When central bankers cannot agree on the direction of cuts and their magnitude, it is almost always because the data are painting a mixed picture. Mr Miran may well be right that the rates need to come down faster to help the labor market (and Mr. Trump who is leveraged at all times). Mr. Schmid could well be right that the rates were at the correct level. Because there was no Non-Farm Payroll Report for October (and there will not be one for November), the Fed cannot know how many Americans are out of work. There is no Producer or Consumer Price Index either, so the rate of inflation is only surmised from here on.
Economists like data. The more data they have, the happier they are. Trying to extrapolate data one does not have from what one does possess is hard, and often, it does not work. ADP puts out jobs numbers related to its payroll business, and that it useful. It is not a substitute for Non-Farm Payrolls.
So, the Fed guesstimates. As USA Today stated, "Available [emphasis added] indicators suggest that economic activity has been expanding at a moderate pace. Job gains have slowed this year, and the unemployment rate has edged up but remained low through August." The Fed judged that downside risks to employment rose in recent months, but it did so without the usual information upon which it relies.
The next meeting in December is unlikely to produce a change to rates. "A further reduction in the policy rate at the December meeting is not a foregone conclusion. Far from it," Chairman Jerome Powell said. The reason is simple; without any new data, the Fed runs the risk of making the wrong move. Not moving at all is a much safer policy decision.
This journal is concerned that the Fed will not have the data it needs but also worries that the changes in the economic landscape are changing. This means the Fed will not know everything it normally would. For one thing, the government shut down costs the US GDP $7 billion a month. In addition, SNAP benefits (food stamps by their old name) are not being sent to recipients on Saturday, so the economic activity that generates is gone ($1.80 for every $1 in aid).
Moreover, the tariffs are finally cycling through the system, and prices will rise accordingly. Inflation may be even higher than the Fed expects by the time the reports and data are flowing again. It is a bit like an airplane flying through clouds on instruments. When the instruments fail, things get bad very quickly. The Fed is going to need to be nimble and cautious for the next while, as things could go any direction from here.
The decline under the Trump administration continues to accelerate.
© Copyright 2025 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Ubuntu Linux.
|
|
|
