The Fed Finally Seems Ready to Pivot

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This week, the Federal Reserve is expected to cut interest rates for the first time in over four years. And there’s debate over how big the cut will be and how soon it will impact the economy.

Bloomberg’s Kate Davidson joins host David Gura to discuss this turning point for the economy, and what else Fed policymakers have in store for the future.

Further listening: What a September Cut Could Mean for the Economy and the Election

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Here is a lightly edited transcript of the conversation:

Gura: This week brings us a big moment – for markets, for the economy, for all of us.

On Wednesday, the Federal Reserve is expected to cut interest rates for the first time in more than four years.

Powell: The time has come for policy to adjust.

Gura: Fed Chair Jerome Powell signaled his readiness to cut rates a few weeks ago, in a big speech he gave at a gathering of economists and central bankers in Jackson Hole, Wyoming:

Powell: The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.

Gura: Powell and his colleagues have said over and over … and over again … that it’s the economic data driving their decision making.

And lately, they’ve seen inflation significantly lower than where it was at its post-pandemic peak. And signs the job market is starting to strain under elevated interest rates.

Powell: We do not seek or welcome further cooling in labor market conditions.

Davidson: So that right there, that language is very important

Kate Davidson is an editor at Bloomberg, who oversees our coverage of the US economy:

Davidson: It kind of harkens back to language that Fed officials have used in years past to basically say, “Okay. We've seen enough, right? We are, we are ready to step in here, and we're ready to provide some relief.”

Gura: Wall Street is taking Powell at his word, that the Federal Reserve is ready to cut interest rates. But there’s a debate about how big that cut will be.

I’m David Gura, and this is “The Big Take,” from Bloomberg News. Today on the show: a turning point for the Fed. How much the size of the cut matters, how quickly it will be felt, and what else we are going to learn this week about what the Fed has in mind for the future.

Gura: So Kate, we've been at this period with pretty high interest rates, at least historically. How big a deal is what's going to happen this week?

Davidson: I think it is a big deal. I mean, interest rates where they are right now are the highest that they've been in more than two decades. And they've been at this level for more than a year. And Fed officials ratcheted them up right during 2022 and, 2023 because they were so worried about inflation. Prices were rising rapidly and they came in in a very aggressive way to stop that. And we are seeing the effect of that, right?

We are seeing the labor market starting to cool and cooling, you know, cooling pretty quickly We're starting to see delinquencies rise. Uh, we're seeing that American households are feeling the effects of high rates now. And so when the Fed, uh, you know, starts lowering them, that's going to provide some relief to all Americans.

Gura: Let's talk about the labor market for a minute – what have we seen there recently that the Fed’s been watching?

Davidson: So there was the big break pandemic shock, of course, where many, many people lost their jobs, and then they all came back to work.

And we actually saw this sort of, you know, inverse situation where employers were having a hard time finding workers. They were having to offer people higher wages, um, and, and they were really struggling to fill positions. They had a lot of vacancies. We have seen a lot of that pretty much come back to normal and even we've started to see the unemployment rate ticking up a little bit, which is is worrisome to Fed officials.

Gura: Let's move to the other side of the Fed's dual mandate — they focus on jobs, but they also focus on inflation, and that's what this fight has been about from the get-go: getting high inflation under control. Where are we now in that fight? And how much farther does the Fed have to go or want to go before they can kind of declare victory on this?

Davidson: Sure. Well, if we think about where prices peaked, this was in early 2022 and, the personal consumption expenditures price index, that's a real mouthful, but that basically that's the, uh, that's the metric that the Fed likes to look at, but looking for a minute at PCE. That peaked at above 6%, um, back in early 2022. Last month, it was down at 2. 5%. So it's fallen pretty dramatically. A lot of that happened in the second half of 2023. So that's why, if you remember, David, at the end of last year, um, heading into this year, there was a lot of enthusiasm, excitement that Fed officials seemed like they were finally ready to start cutting rates at the beginning of the year.

And then they got a little bit of a scare in the first few months of the year. It looked like inflation was starting to re-accelerate. It was starting to pick back up. And that's happened to them a couple of times. So they were really wary of kind of declaring victory. And they probably still haven't exactly said the words, although the fact that they're cutting rates is, is kind of an acknowledgment that they've, they've essentially won this inflation battle.

But they're that doesn't mean that they're literally at 2%, which is the rate they target. They've still got a little ways to go. It just might take another, another year or two really.

Gura: So there may be some disagreement about the size of the cut that we're going to get this week, but it does seem like there's near unanimity that there is going to be a cut. How is the Fed Chair, how are policymakers thinking through, uh, this decision in particular? How big that cut should be?

Davidson: So, the risk is that if you wait too long, if you move too slowly, that unemployment rate can start to rise very quickly.

So that would be the argument for going sooner or now, in this instance, for going bigger that you want to forestall any dramatic weakening. And I think for Fed officials, they have so far that look, they're at a position that no one thought they would be in a year or so ago. I mean, everyone, I shouldn't say everyone, but a lot of people certainly thought that they weren't going to be able to bring inflation back down without, essentially triggering a recession without a more pronounced uptick in the unemployment rate.

And they've pretty much up to this point, they've managed to do it. They've found this elusive soft landing and they really don't want to screw it up, to put it bluntly. I think they, want to preserve and protect this economic expansion that's happening right now. So why not go big?

I think the argument would be that it's not going to make a huge difference, right? Start gradually, go at a measured pace, and then you can always adjust later if you feel like, you need to do more to support the economy.

Gura: How much does history factor into their thinking here – Just looking back on past efforts to execute that kind of soft landing where they do avoid a recession, also where it might’ve backfired in the past. What does, what does history tell them about what they need to do and not do in this moment?

Davidson: Well, I think that history was a really important guide for Jay Powell personally, um, early in the, in the inflation fight when they finally did start, raising rates very aggressively. And I think it was an important guide, earlier this year when they saw that inflation had picked up a little bit.

I mean, they were very, very concerned about backing off too soon. In other words about stopping rate hikes too soon, and then about lowering rates too quickly. And I think that that was very much guided by what they had seen previous Fed chairmen struggle with. Before Paul Volcker came in, and he's of course the Fed chairman who, known for being the one to ultimately, win the battle over this high inflation of the 70s and 80s. There was Fed Chair Arthur Burns.

And unfortunately, he has kind of gone down in history as the Fed Chair that really let inflation get out of control. And I think that that was very much on Jay Powell's mind. Of course, he talked a lot about Volcker and, um, and the tough decisions that he had to make, and there was a painful recession at that time.

So I think, um, you know, Fed officials once they started to realize that, you know, that they had actually made quite a bit of progress and that they didn't see recession as imminent. I think they started realizing that this time really could be different. And so they are perhaps thinking a little bit differently about how they're handling things from here on out.

Now that it seems that inflation really is in hand, I think they're feeling good about it now and seeing that, wow, things were really were different. We did this in a different way. It's been working and let's just try and keep that going.

Gura: Of course we've got an election coming up here in just a couple months, and I wonder how that's going to affect the Fed this week as it makes a decision and maybe how it'll affect decisions in the future?

Davidson: So, this is always a bit unknown. If you were to look back at transcripts from Fed meetings in the past, they almost never talk about politics. And Jay Powell, any time he gets asked about this, will remind people, uh, look at the transcripts. We don't take this into account at all. And I think that that is probably true to a point.

I think that probably where it's going to be weighing on everyone's mind, even if it's not discussed around the table, is that there will be political reaction. This move is coming seven weeks before election day. Um, so I think if nothing else, they're probably just bracing themselves a little bit.

For this blowback that I expect they probably will get from some people, um, probably from former President Trump. He's already come out previously and said that he, he thinks that a rate cut before the election will be a political move by the Fed.

And of course, you know, the way the Fed sees it is they are doing what's, what's best for the economy and they really can't change that decision based on the timing of the election calendar.

Gura: After the break – how soon will we feel the impact of the Fed’s actions this week and what’s up with the dot plot? Why are people so obsessed with it?

Gura: I’ve been talking with my colleague Kate Davidson, who oversees coverage of the US economy… About the impacts a rate cut could have…

So Kate after the Fed cuts rates on Wednesday, presuming they do, what's going to happen? What are the immediate effects that we're going to see on the economy as a result?

Davidson: So I don't think that the rate cut, especially if it's a smaller quarter point rate cut, it's not going to have a huge effect on actual economic activity, right? The trajectory of jobs added or investment, or consumer spending. But I do think that it, you know, it changes the way people feel.

I think it maybe changes the way that they're planning, uh, if they're business owners or they're a family, maybe looking at buying a new house. I think it, it probably will inject some sense of economic optimism, uh, that there is some relief coming. So I think that, it's more, probably initially about that.

That change in sentiment, but as far as the, the actual economy, I mean, we are, we have already seen mortgage rates start to come down, um, in anticipation of this cut. So as, I think that as these things start to filter through markets and in turn start to, I think, filter through the economy a little bit sooner than they would have in the past.

Gura:. We've talked about kind of the economic effects of, of this, but, um, how have markets been, approaching this, thinking about this, how are they likely to react to the rate cut that we get this week?

Davidson: Yeah, it's interesting because it's, I think markets would prefer a bigger rate cut. I think markets are a little more on edge, have been a little more on edge about, uh, the economic data that we've seen, especially we saw that, um, not great, uh, jobs report that we got in early August showing the, weak hiring in July.

And that led to some, you know, temporary panic over the summer about where the labor market was headed. So I think that markets could be a little bit disappointed if Fed officials opt for a smaller cut, but there's always the possibility that Jay Powell will come out and will reassure them that, the Fed is prepared to go for a bigger cut to lower rates, uh, more quickly if they start to be more concerned about the labor market and the broader economy.

Gura: Kate, there's this meeting, uh, it's been such a big focus, then there's what happens next, what's going to happen at future meetings. What are we going to learn on Wednesday about the Fed's path forward?

Davidson: So on Wednesday, Fed officials will release their summary of economic projections. It's called, it's a quarterly forecast that each individual policymaker submits. And it's important to note that because it's not a consensus plan. It's not something that they all talk through and say, okay, we're going to write down that we think we're going to do this.

It's basically bringing together all of the, the different forecasts that, um, that each Fed official submits for where they see the unemployment rate, where they see interest rates, um, you know, at the end of the year and in future years where they see inflation. it will give us a sense though of where most of them I think see rates headed through the end of the year and into next year.

Gura: Kate, we're gonna get these forecasts in a phrase we hear over and over again is the dot plot. What is the dot plot and how do you sort of divine anything out of all of those circles and lines that we'll get from the Fed on Wednesday?

Davidson: Yeah, the dot plot. It's so wonky. We all get very excited about it. And what will happen is, you know, they distribute this piece of paper, and this summary of projections. And it shows where each Fed official, each of them is represented with a dot on a chart. And so each dot shows where each policymaker is anticipating that rates will end up and they aren't identified by name, to be clear. These are anonymized. They are meant to signify where rates will be at end of of the year. And so I think this year, though, in particular, will be very interesting because we're already in September.

So that's going to give us a really clear sense of, I think, where various officials think, the rates will be high. In other words, how many, how many rate cuts they might be expecting to, to do before December.

Gura: Kate, lastly, it's become kind of a tradition that you and I talk ahead of these big Fed meetings. And I think I always ask you some version of the same question, which is, what are you going to be listening for? What are you going to be looking for when you see those, those data points, that dot plot that comes out from the Fed?

Davidson: Well, I think when we look at the dot plot, we will be looking to see how much divergence there is among Fed officials. You know, how much, uh, uh, do they seem to mostly be all on the same page or is there a big range of views about where rates should head over the coming months? Because I think that's really important.

We know that Chair Powell, uh, has been very consensus driven. Um, there has not been a dissent at a Fed meeting in a very, very long time. And, uh, as we get into sort of trickier moments where there are closer calls, and this is certainly one of them, I think that the likelihood of someone voting against an action grows So that will be one thing that I think is really important, and I think just generally listening for how worried he is about the state of the labor market. There's been a sense that Powell tends to come out in these press conferences and sound a little bit more dovish than the dot plot would suggest, or perhaps in the decision would imply.

And so, we will be listening for that too, basically trying to figure out, did he want to go 50 or 25? That's what we're always trying to, to suss out.

Gura: Kate, thank you very much.

Davidson: Thank you.

Gura: I’m David Gura, and the is “The Big Take,” from Bloomberg News.

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