Predicting what will happen in 2024 is tricky. But an easy way to tell whether things will go well this year is to see if Powell becomes forgettable. The less he’s in the headlines and talked about on TikTok, the better the economy is probably doing.
There’s one task left on Powell’s to-do list: cut interest rates. There’s no rationale for rates to remain at nearly 5.5 percent. Keeping them there would be akin to slamming the brakes on the economy. Rates were intentionally raised to slow spending in an effort to tame inflation. Powell is honest about this. At his December news conference, he referred to “restrictive” rates nine times. On Wednesday, Powell said he needs “greater confidence” that inflation is on a path back to target. He went out of his way to say a rate cut is unlikely at the Fed’s next meeting in March. That was a mistake. Inflation continues to trend down. The preferred inflation measure came in at 2.9 percent (annualized) in December, which is within striking range of the goal. The Fed should acknowledge this — and lower rates.
The greatest risk now would be for the Fed to keep rates so high this year that they cause a recession. As Powell himself said in December: “You’d want to be reducing restriction on the economy well before 2 percent because — or before you get to 2 percent so you don’t overshoot.”
If “restrictive” was the Fed buzzword in 2023, it should be “normalize” in 2024.
Forget the debates about whether this is a “soft landing” or “no landing” scenario. It’s time to send a message that the economy is healthy and close to the inflation and job targets set by Congress. The Fed needs to lower rates enough to get the housing market moving again. This doesn’t mean huge cuts, but getting back below 5 percent could make possible a lot more purchases and projects.
Ideally, rates would be back under 5 percent by this summer. While Wall Street is salivating at the prospect of even lower rates, Powell could argue that the Fed is at least no longer causing a recession and is merely allowing the economy to move mostly on its own terms.
The truth is, interest rates haven’t been normal in almost 20 years — since before the big 2007-2008 financial crisis. It’s difficult to remember a time when the Fed wasn’t furiously trying to prop up the economy and banking system with ultralow interest rates or, in the past year, trying to squeeze out inflation with high rates. Wall Street and many businesses and consumers had become addicted to “cheap money.” Already, people are eyeing the potential rate cuts as a sign that cheap money is back. Changing that narrative will be hard. But if Powell can get rates back to something close to normal, it could be the greatest achievement of his Fed tenure.
There’s also a strong case to be made for starting to cut rates in March that has to do with politics. A recession this year would almost certainly mean President Biden won’t get reelected. The Fed wants to maintain independence from politics. Beginning rate cuts soon and holding them by the end of summer would lessen the Fed’s influence on the election.
While there’s always a risk of another pandemic, a wider war in the Middle East or some other cruel surprise, the big inflation scare has passed, for now. And the job market is basically back to 2019 conditions. (There are still more openings than job seekers, but the gap has narrowed, and wage growth has slowed.) If a shock comes, the Powell Fed has shown that it can move fast when it needs to — as it rescued markets in March 2020, and as it tweaked rates in the summer of 2019 during President Donald Trump’s trade war.
The greatest gifts Powell can give the nation are no recession in 2024 — and an end to the outsize Fed role in the economy.
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