Wednesday was Day 2 of Federal Reserve Chair Jay Powell’s testimony on Capitol Hill, and it sounded a lot like Day 1: We’re making progress on inflation, but not yet hanging up the „mission accomplished” banner.
In two years, the Fed has raised rates and kept them high, a „long and variable backlash” that is key to understanding how long it will take to slow those rate hikes.
Well, now that inflation is down and the economy is showing signs of slowing, Wall Street expects the Fed to start cutting rates. But does the „long and variable lag” for rate hikes also apply to rate cuts?
Part of the Fed’s job is to carry the punch bowl before the economy gets so crazy that they start keg stands on the front lawn.
Fed Chair Jay Powell took the punch bowl a while back with those rate hikes, and now, that party seems finally dead.
„He’s got his hands on the punch bowl and he’s going around the room picking it up,” said Ann Owen, an economist at Hamilton College.
Even if the central bank decides to cut rates, the economy will not bounce back immediately, he said. That’s because when borrowers see an interest rate cut, they wait even longer.
„If you’re the type of person who thinks, 'You want to buy a new car, but prices are going to be a little high.’ Well, when the Fed eventually cuts rates, they’re not going to do it just one time. You should wait a little bit if you can, because they’re going to go down even further.” Going,” Owen said.
While economists agree that rate cuts don’t immediately juice an economy, there’s no consensus on how long that backlash lasts.
„It’s hard to tell when the Fed is cutting rates because the economy is already in recession,” Wells Fargo economist Sarah House said. „So in some ways, when you already have so many negative forces, it’s very difficult to isolate how much rate cuts are doing.”
While history is no guide, some research indicates that rate cuts won’t help the job market.
Michael Capen, managing director and head of U.S. economics at Bank of America Global Research, said it’s easier to retreat than to generate economic activity.
„You can lower interest rates all you want, but you can’t force a company to hire, you can’t force a family to spend,” he said.
You know the old expression: You can carry an economy to a punch bowl, but you can’t drink it.
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