Fed’s expected rate cut comes with an economic dilemma

the Federal Reserve He is scheduled to announce his next interest rate decision on Wednesday and the monetary policy meeting comes as the economy faces a weak labor market as well as rising inflation.

Fed policymakers are widely expected to cut the federal funds rate by 25 basis points, lowering the target to a range of 3.75% to 4%. The expected rate cut comes after the Federal Reserve lowered interest rates by this amount at its September meeting. Markets are also anticipating another rate cut of this size at the Fed’s subsequent meeting in December.

The Dow Jones Industrial Average, Nasdaq Composite and S&P 500 are at record levels. The Dow Jones closed above 47,000 for the first time on Friday.

Latest Inflation data The September report released on Friday showed that the Consumer Price Index (CPI) rose to 3% year-on-year. The ongoing government shutdown has delayed the September jobs report indefinitely, although data released over the summer showed a slowdown in hiring dating back to this spring — creating a difficult situation for policymakers.

“3% inflation is usually high enough for the Fed to consider raising interest rates in order to bring inflation closer to its 2% target,” Ryan Young, chief economist at the Competitive Enterprise Institute, told FOX Business.

Inflation remained well above the Fed’s target in September before the decision to cut interest rates

“This time, there are warning signs across the economy, from rising unemployment to seven straight months of contraction in manufacturing due to the tariffs,” Young said. “This is what is pushing Fed officials toward lowering interest rates. But this stimulus comes with a trade-off: It risks higher inflation. They are taking a chance, and it may not pay off.”

Lower interest rates to support Labor market — despite the risk of a return of inflation — could also have an impact on federal spending. The cost of servicing the national debt, which exceeded $38 trillion, exceeded $1 trillion in the fiscal year that ended at the end of September.

EJ Anthony, chief economist at the Heritage Foundation, noted in an interview with Fox Business that high interest rates on US Treasury bonds have risen. National debt It prompted the Treasury to continue issuing short-term debt, rather than extending the term at lower interest rates.

“Part of the problem we have now is that debt issuance is too dependent on short-term debt,” Anthony explained. “The reason the Treasury Secretary is doing this is because interest rates have not fallen yet.”

The Fed’s Powell points to continued weakness in the labor market as the government shutdown delays official reports

The Fed faces challenges on both sides of its dual mission of promoting price stability and maximum employment. (Samuel Corum/Bloomberg via Getty Images/Getty Images)

“If you lock it in for those very long terms, now you’re stuck paying high levels of interest for a very long period of time, so we basically have to constantly roll over the debt in the short term and hope and pray that our benevolent overlords at the Fed will lower interest rates at some point soon so we can lock in those low rates,” Anthony said.

When the Fed cut interest rates last September by 50 basis points to begin a rate-cutting cycle, Treasury yields rose and exacerbated the debt service problem.

“Just because the Fed moves a particular interest rate in one direction does not mean you will see a similar move in consumer interest rates or in the rate of Treasury securities,” Anthony said. “Let’s say we get a bunch of cuts from the Fed, but then congress goes back to a spending spree and it’s just the government Borrow money Fist delivered. What is happening? “You will see interest rates rise again.”

Fed meeting minutes show that policymakers remain concerned about inflation as they consider interest rate cuts

Former Fed Governor Kevin Warsh is running to replace Fed Chairman Jerome Powell. (Tierne Cross/Bloomberg via Getty Images/Getty Images)

Former Federal Reserve Governor Kevin Warsh said in an interview on Fox Business:Maria Bartiromo Wall Street“The Fed has done a poor job of managing inflation expectations and new leadership is needed.

“The reason most households and most businesses believe inflation will remain well above 2% is because that is what the Fed provided,” Warsh said. “I think until there is a regime change at the Fed, until there are new people running the Fed with a new framework, they are stuck in their old mistakes.”

Warsh, who is being considered by the Trump administration to succeed Fed chair Jerome Powell When his term ends next year, he added, “The real reason we’re making progress on the inflation front is not because of the Fed, in my opinion, Maria. It’s because of the president’s policies.”

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“His policies did It boosted the economy. His policies led to lower prices. But unfortunately, the Fed is working at cross-purposes. “I honestly completely understand his frustration,” Warsh added.