Why Immediate Rate Cuts Aren’t on the Fed’s Agenda

Usually, I’m skeptical of economists' predictions, especially after they missed the mark on inflation in 2021, the Fed's actions in 2022, and the likelihood of a recession in 2023. But this time, they might actually be onto something. When it comes to the Federal Reserve's plans for interest rates this year, economists' predictions might be more accurate than the market’s expectations.

According to a Bloomberg News survey, 80% of the 51 economists surveyed believe the Fed will lower interest rates by just a quarter of a percentage point at their September meeting. Only 10% think there’s a chance of an earlier rate cut this month.

Earlier this week, the futures market was almost certain the Fed would cut rates by half a percentage point in September. Some even expected a quarter-point cut in August, followed by another in September. As market fears have calmed, these expectations have lessened, but many still think there’s a 50% chance the Fed will lower rates by half a point after its next meeting.

Unless something drastic happens, like a severe economic downturn or a major global crisis, an emergency rate cut between meetings is highly unlikely. The Fed usually only makes such moves during emergencies, not just because of a stock market drop or rising unemployment.

Caution Around Election Time

The Fed is likely to be even more cautious now, especially with the uncertainty surrounding inflation and the upcoming election. Although inflation has been declining, the Fed wants to avoid making moves that could reignite inflation. The election adds another layer of caution—depending on the outcome, new policies could impact inflation, and the Fed doesn’t want to act too hastily.

Looking ahead, the economists surveyed by Bloomberg expect the Fed to lower rates by a total of 75 basis points by the end of the year, likely through three quarter-point cuts at the remaining Fed meetings. The market is predicting more significant cuts, but both predictions might be overestimating how much the Fed will actually do.

The FED’s Role in Delaying Economic Reality

Over the years, both Congress and the Federal Reserve have repeatedly "kicked the can down the road" when it comes to managing the nation's fiscal and monetary challenges. This strategy of postponing tough decisions has had serious consequences, leading to life-changing inflation and a historic level of national debt.

Avoiding Tough Decisions

Instead of addressing the root causes of economic issues, Congress has often chosen short-term fixes to avoid political fallout. Whether it’s passing temporary spending bills, extending debt ceilings, or implementing stopgap measures, these actions have allowed the government to delay necessary reforms. This approach might provide temporary relief, but it only worsens the underlying problems, leaving the economy more vulnerable in the long run.

The Federal Reserve’s Role

The Federal Reserve has also played a part in this cycle of delay. To stimulate the economy during downturns, the Fed has repeatedly lowered interest rates and injected massive amounts of money into the financial system through programs like quantitative easing. While these actions may have been necessary in the short term, they have also contributed to an environment of easy money and cheap borrowing, which has fueled asset bubbles and encouraged excessive risk-taking.

Consequences: Inflation and Debt

The results of these policies are now clear: we’re facing life-changing inflation and a national debt that has reached unprecedented levels. Inflation erodes the purchasing power of everyday Americans, making it harder to afford necessities like food, housing, and healthcare. For many, the rising cost of living has become a daily struggle, forcing tough choices and lowering the overall quality of life.

At the same time, the national debt has ballooned to historic levels, putting future generations at risk. Servicing this debt requires an ever-increasing portion of the federal budget, crowding out other important spending priorities like infrastructure, education, and social programs. As the debt continues to grow, so does the risk of a fiscal crisis, where the government might be forced to make drastic cuts or raise taxes sharply to avoid default.

The Need for Change

It’s clear that the strategy of "kicking the can down the road" is no longer sustainable. The consequences are already being felt, and they will only get worse if action isn’t taken soon. Congress and the Federal Reserve need to confront these challenges head-on, making difficult but necessary decisions to bring the nation’s finances back on track. This means reining in spending, addressing the drivers of inflation, and implementing policies that promote sustainable economic growth without relying on endless borrowing and easy money.