WHERE WE STAND TODAY
The FED has already cut interest rates by more than 1 percent over the past year, in an effort to support the economy after the pressures of recent years. Yet now the environment is filled with uncertainty. In next week’s meeting on December 10, officials appear more divided than ever.
On one side are those who believe the labor market needs additional support. They see signs of fatigue in the economy, a mild rise in unemployment, and stress in certain sectors. They argue for another rate cut to keep demand steady and prevent a slowdown.
On the other side, there is strong resistance. Other FED officials worry that inflation is not yet fully under control. It remains above 2 percent and, in their view, any further monetary easing could destabilize prices, especially in an environment of geopolitical tensions and trade tariffs.
Jerome Powell, the FED’s chair, has publicly admitted that within the committee there are “strongly differing views” on which priority should come first: price stability or full employment.
THE NEUTRAL INTEREST RATE
Inside the FED, and in the broader economic world, there is a constant question: What is the interest rate level that neither stimulates nor restricts the economy?
This is called the neutral rate or r-star, as models label it. It is a theoretical concept. It cannot be directly measured, only estimated through models and assumptions.
The problem is that no one agrees on what this number actually is.
In September, 19 FED officials offered 11 different estimates. The lowest was 2.6 percent, the highest 3.9 percent, roughly where rates stand today.
So what does this mean? Some believe we are at neutral levels, others say policy is already restrictive, while others insist rates should be lowered further. Complete disagreement.
THE VIEWS
The president of the Philadelphia Fed, Anna Paulson, warned that we are approaching a turning point. As she said, “every additional cut pushes policy closer to the point where instead of restraining the economy, it begins to stimulate it,” and that carries risks.
Neel Kashkari, on the other hand, believes that advances in artificial intelligence will boost productivity, increase investment, and therefore raise the neutral interest rate. In his view, the economy can withstand higher rates without harming growth.
Stephen Miran, appointed by President Trump, sees things differently. He believes that recent policies such as tariffs, migration restrictions, and tax cuts have reduced the economy’s long-term potential. And with it, the neutral interest rate. Therefore, he argues for more aggressive easing now.
John Williams of the New York Fed, one of the leading theorists of r-star, thinks the trend is clear: due to population aging, low productivity, and global conditions, the neutral rate remains low. And it will stay that way.
And in the middle of all this, the crucial December 10 meeting is approaching. Estimates show an 89.2 percent chance of a rate cut, but everything will depend on the latest unemployment and inflation figures.
Markets have priced in partial stability, yet everyone knows that a single statement or announcement can shift sentiment entirely.
Posted Using INLEO