The Federal Reserve’s Federal Open Market Committee (FOMC) announced today that it will maintain the current target policy interest rate (the federal funds rate) of 5.5 percent. The committee has now held the rate at this level since the end of July 2023.
According to the FOMC’s press release:
The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities.
After such a long period holding rates flat, it would be unprecedented for the Fed to begin a new cycle of rising rates. Given this, and given that economic indicators continue to weaken, we can be quite confident that once the FOMC feels it is politically advantageous to do so, it will force down rates even lower. The committee’s claim that it needs “greater confidence” before lowering rates all but guarantees the target rate is headed down soon. Indeed, during today’s FOMC press conference, Fed chairman Jerome Powell stated that the committee did discuss the prospects of lowering the target rate. This is a clear signal that the FOMC is planning to cut the target rate, and this further suggests that the Fed is seeing the growing economic malaise.
Wall Street Wants a Rate Cut
For some Fed insiders, however, a rate cut isn’t coming soon enough. Last week, former New York Fed president Bill Dudley—who had formerly called for holding the target rate “higher for longer”—announced that he has changed his mind and stated he believes the Fed should cut the target rate now, and “preferably at next week’s policymaking meeting.”
As a former president of the New York Fed, Dudley is essentially a mouthpiece for Wall Street, so his demand for lower rates suggests mounting discomfort with the state of the economy among investors. This discomfort stems from a slow drip of bad economic news which concerns Wall Street, and which is sure to contribute to calls for aggressive cuts to the target interest rate.
For example, economists from both Bank of America and Citigroup have expressed concern over “cracks” in consumer sentiment, especially at lower income levels.
Weakness in the labor market can also be seen in the federal government’s own data, in spite of a repeated media drumbeat about “solid” jobs numbers. As we’ve noted here at mises.org many times in recent months, the US employment market is currently in recession as far as full-time jobs are concerned. The job growth we now see is overwhelmingly driven by part-time jobs and government jobs.
Moreover, the most recent JOLTS report from the BEA shows a couple of interesting (and negative) trends. The first is that job openings continue to decline. Of special interest, however, is how the decline in job openings would be far larger were it not for the fact that government job openings have been surging to near all-time highs in recent months. As with overall payrolls, we find that the jobs economy continues to be propped up by the massive amounts of government spending that are pushing national debt totals to unprecedented levels.
A second point of interest is the fact that new hires have plummeted. In June, for example, hires fell to 4.9 million. That’s the lowest level reported since the Covid Panic. Excluding covid, June’s total was the lowest since 2017.
And then there is the Fed’s Beige Book report which basically tells us that most of the US economy is either flat or in decline. Specifically, the Beige Book tells us that economic activity “fell slightly” in two of twelve Fed districts, with only two districts achieving even “moderate growth.” Every other district showed only “slight” growth. Meanwhile, 86 percent of the nation’s metro areas experienced a rising unemployment rate for the year ending in June.
Of course, for the average consumer of mainstream news, the idea that the economy is anything other than shockingly robust would be quite a surprise. Last week, for example, the media narrative was that the GDP report for the second quarter of this year “shattered” forecasts. The BEA’s reported GDP growth rate of 2.8 percent for the second quarter, we are told, is amazing news—but more savvy observers have noticed that this is being driven largely by runaway government spending.
In other words, if we’re looking at economic data with an eye toward Fed policy, it’s a safe bet that some old GDP numbers from June are not going to translate into any hawkish policy from the FOMC.
At this point, a rate cut by the end of year is nearly baked in. Moreover, when the Fed does cut, that’s a virtual admission that the Fed fears a recession has already started. In every cycle for more than forty years, the Fed has cut rates after the recession has already begun.
The Fed’s Political Bias
On the other hand, the Fed may elect to do nothing in order to avoid the appearance of a partisan bias. There is a feeling among some Fed watchers that the Fed could cut rates right before the election in an effort to help the incumbent party. Surprisingly—given how most Fed-watching journalists rarely ask anything controversial—this topic actually came up during the FOMC briefing today. Jolene Kent of CBS, noting some earlier comments from Donald Trump, asked if cutting the target rate near the election could be politically motivated. Kent even goes so far as to ask if the Fed can be truly apolitical. In response to this, Powell came across as rather defensive and stated that “anything we do before during or after an election will be based on the data … and not on anything else.”
Powell, of course, responded exactly as we would expect him to. He has to say that, and the Fed can never admit to any political biases.
Needless to say, this question would have never been asked 20 years ago or at any point during the reign of “maestro” Alan Greenspan. Fortunately, however, doubts about the Fed’s political motivations have become so commonplace that even mainstream reporters feel the need to ask about it.
Kent’s question was nonetheless not as incisive as it could have been. It is likely that the political bias she was talking about was mere partisan bias. That is, she was asking if the members of the FOMC are pushing for any particular candidate. It’s a fairly safe bet that most of the committee leans Democrat, but that’s not what really matters when it comes to FOMC bias. The FOMC is not oriented so much toward helping any particular party, but is far more concerned with protecting its own power and the power of the regime in general.
That is, the Fed is in the business of regime maintenance. As far as the regime’s financial powers go, no major candidate in 2024 presents much of a threat at all, so partisan bias isn’t likely to be a driving factor for the FOMC. After all, when Trump was president, he aggressively pushed for easy money just as every incumbent tends to do. Trump may have his problems with certain elements of the regime, but the Federal Reserve is not among these.
Regardless of who is elected, we can look forward to the Fed doing what it always does: it will begin to force down the target interest rate even more as economic conditions worsen. The Fed will then orchestrate a series of bailouts for major corporations and other friends of the regime. We’ll also stop seeing statements from the Fed (like the one in today’s press release) about how it plans to continue reducing its balance sheet.
It doesn’t matter who wins the election as far as this series of events is concerned.
A multitude of economic indicators continues to point to a recession that is either on the way or has already started. The Fed is preparing us for a rate cut, and the only question is how soon it will come.
