The Federal Reserve’s Upcoming Meeting: More at Stake than Economic Growth
The Federal Reserve is set to meet this week to discuss interest rates, but the stakes are higher than just economic growth. Recent job numbers have been dismal, leading some experts to wonder if the US is already in a recession. Moody’s Analytics chief economist Mark Zandi said in an interview with CNBC that the Federal Reserve desperately wants to avoid a recession, not just because of the economic implications, but also because it could impair the Fed’s independence.
The Threat to Fed Independence
The Federal Reserve’s independence is a crucial aspect of its ability to make decisions without political interference. However, with the current administration’s pressure on the Fed to lower rates, some experts are concerned that the central bank’s independence is under threat. Wharton finance professor Jeremy Siegel laid out a scenario in which Fed Chairman Jerome Powell may need to resign to preserve the Fed’s long-term independence. Siegel’s reasoning is that if the economy stumbles with Powell still at the helm, the current administration can point to him as a scapegoat and ask Congress to give the White House more power over the Fed.
The Appointment of Stephen Miran
The appointment of Stephen Miran to the Fed has also raised concerns about the central bank’s independence. Miran, who is set to join the Fed without resigning as chair of the White House’s Council of Economic Advisers, has previously called for changes that would erode the Fed’s independence. JPMorgan said in a note that Miran’s appointment "fuels an existential threat as the administration looks likely to take aim at the Federal Reserve Act to permanently alter U.S. monetary and regulatory authority."
Fed Rate Cut: A Virtual Certainty
Despite the pressure from the current administration, the Fed has largely resisted calls to lower rates. However, the sudden deterioration in the job market has made a rate cut a virtual certainty. The Fed meets on Tuesday and Wednesday, and the only question on Wall Street is whether rates will come down by 25 basis points or 50 basis points from the current level of 4.25%-4.5%. JPMorgan chief U.S. economist Michael Feroli expects two or three dissents for a larger cut and no dissents in favor of keeping rates unchanged.
Expectations for the Meeting
Mark Zandi said that the bar is high for a half-point cut, but "there’s a possibility we could get over that." He added that a JPMorgan forecast for six cuts by the end of 2026 is reasonable, assuming a neutral level for the fed funds rate is about 3%. Zandi also said that it’s possible that the economy is weaker and recession risk higher, which could lead to a lower fed funds rate of 2.5% to 3%.
Conclusion
The Federal Reserve’s upcoming meeting is crucial, not just for the economy, but also for the central bank’s independence. The pressure from the current administration, combined with the dismal job numbers, has made a rate cut a virtual certainty. However, the Fed must balance its decision with the need to preserve its independence and avoid being seen as a political tool. The outcome of the meeting will be closely watched, and its implications will be felt for months to come. As the Fed navigates these challenging times, one thing is clear: the stakes are higher than just economic growth.
