The Federal Reserve voted to cut rates by a half point recently, its first reduction in four years, instead of a more traditional cut of a quarter point, or 25 basis points.
There was one dissenter in the vote, Fed governor Michelle Bowman, who argued the cut “could be interpreted as a premature declaration of victory” over inflation.
Inflation is running close to 2.5 percent, slightly higher than the Fed’s 2 percent goal. Bowman said she would have potentially approved of a smaller cut.
Her move was noteworthy because none of the governors had cast a dissenting vote in 19 years until this week.
Q: Did the Federal Reserve go too far with its half-point reduction?
Economists
Caroline Freund, UC San Diego School of Global Policy and Strategy
NO: Too much is being made of the half-point reduction. The labor market is cooling, inflation is coming down, and monetary policy works with a lag. Consumer confidence fell sharply in September, consistent with a slowing economy. The Fed could have cut in July, and this larger reduction allows for catch up. They were late in raising rates when inflation appeared in 2021, they don’t want to make the same mistake in the opposite direction.
Kelly Cunningham, San Diego Institute for Economic Research
YES: Half-point rate cuts, usually reserved for times of crisis, send a clear signal the Fed recognizes worsening economic conditions. If the economy was so “great” or “solid” why cut rates at all? With higher unemployment and recession looming, price inflation remains. A slowing economy will be disinflationary, so the Fed is more concerned for the moment over job losses and rising interest debt. This was clearly a political move prolonging economic turbulence just before the election.
James Hamilton, UC San Diego
NO: Everybody was expecting the Fed to begin reducing rates starting with a one-quarter- to one-half-point cut at the last meeting. The Fed decided to start with the bigger initial cut. But this just means that the Fed is going to get to a lower level of interest rates a little more quickly than many of us expected. It’s a sign that the Fed believes inflation is getting under control. Let’s hope they’re right.
Norm Miller, University of San Diego
NO: The Federal Reserve simply gave more priority to softening employment data rather than focusing solely on inflation reduction mandates or they felt confident that inflation is coming back toward the 2 percent goal. They will likely continue to cut 25 basis points in each of the next few meetings.
David Ely, San Diego State University
NO: Hiring and wage growth have slowed while inflation as measured by the personal consumption expenditures price index has fallen from 7.1 percent in 2022 to 2.5 percent. The Fed’s priority needed to shift from managing inflation expectations to moving to an interest-rate environment more supportive of economic growth. While a Federal Reserve governor has not cast a dissenting vote for almost two decades, other voting members of the Federal Open Market Committee have.
Ray Major, economist
YES: The target inflation rate is 2 percent, but it is running at 2.5 percent. Reducing interest rates now adds inflationary pressures to the economy, which could mean that the target is not achieved. However, we won’t know the effects until after the November elections. A quarter point cut would have been a more reasonable move leaving room for another rate cut at the next Fed meeting. The half-point reduction reeks of election year politics.
Executives
Phil Blair, Manpower
NO: The Federal Reserve bankers know very well that the goal is a soft landing without damaging the job market. We need to trust them as the professionals that they are that it was time for a half-point decrease. This is why we need to keep the Federal Reserve separate from any political control.
Gary London, London Moeder Advisors
NO: It’s time to declare victory over inflation. Inflation levels have been dropping this year, and prices are also starting to drop in oil, autos and will gradually follow in other sectors. The higher cut is designed to focus on a weakening labor market by encouraging companies to shift their resources to hiring as they save on interest rates. The Fed goal is to avoid a recession. This move to monetary easing is overdue.
Bob Rauch, R.A. Rauch & Associates
NO: While inflation is still present beyond the 2 percent target, the economy could fall into a recession for numerous reasons, including job growth, and threats from outside countries like China, Russia and Iran can destabilize us. We’re at a point where the economy is strong, inflation is coming down, and it would be nice to avert a recession. Fifty basis points is the correct number. Business activity should improve, and households will rejoice.
Austin Neudecker, Weave Growth
NO: The Fed’s half-point rate cut was a prudent move given recent economic indicators. With inflation approaching the 2 percent target and unemployment rising, the aggressive cut aims to bolster the economy and prevent movements toward a recession. The decision reflects the Fed’s shift in focus from inflation to economic growth and job market stability. This proactive approach, and promises of future reductions, should help maintain the delicate balance between price stability and employment.
Chris Van Gorder, Scripps Health
NO: While the Federal Reserve could have taken a more cautious approach and is likely to do so in the future if this rate cut works, there was some anxiety that we were tipping toward a recession. For that reason, the Fed likely looked at the employment/unemployment data and decided the economy could absorb a larger reduction. And this will help move it toward its long-term goal of reducing inflation back down to approximately 2 percent.
Jamie Moraga, Franklin Revere
YES: The reduction was a bit aggressive; the Fed should have taken a more conservative approach by starting with a quarter-point cut. Additional cuts could have been implemented once the waters were tested. Bowman is the first central bank governor to dissent against a policy decision favored by the Fed chair in 19 years. Is this playing politics, or does the Fed know something the market doesn’t? Seems like a roll of the dice decision.
Haney Hong, San Diego County Taxpayers Association
NO: The Fed has to manage inflation and prices while trying to maximize employment. By making capital less expensive, businesses will be able to hire more and potentially counter the trend in growing unemployment – and the bigger rate move will spur more hiring quickly. The Fed has to walk a tightrope, and I think they’re doing well. It’s nice to see an institution actually working as intended.
Not participating this week:
Alan Gin, University of San Diego
Have an idea for an Econometer question? Email me at phillip.molnar@sduniontribune.com. Follow me on Threads: @phillip020
Originally Published: September 25, 2024 at 11:12 a.m.