The first article is Interest Rates Will Be Higher in the Future, Especially if Trump Is President: Big tax cuts on top of high federal debt and less easy Fed policy could create perfect conditions for rising rates by Greg Ip of The WSJ. Excerpts:
"In economists’ jargon, the “neutral rate,” which keeps inflation and unemployment stable, has apparently risen. As recently as December, Fed officials thought neutral was 2.5%. By September, they had raised that to 2.9%, and some officials had put it at 3.5% or higher." [see the link below to a related post-that post has more examples of this uncertainty and a graph that explains how the neutral interest rate works]
"Since 2007, the federal debt has climbed from 35% of gross domestic product to 98%."
"in the past fiscal year, Washington borrowed $1.8 trillion. At 6.4% of GDP, that’s a record outside of war, recession or crises such as the pandemic."
"Research has found that bond yields rise by 0.01 to 0.06 percentage point for each 1% of GDP the debt rises"
"Research has found that bond yields rise by 0.01 to 0.06 percentage point for each 1% of GDP the debt rises, according to a review in a recent Fed paper. When those estimates are applied to the CRFB’s various scenarios for debt by 2036, that could imply anything from 0.25 to 2 percentage points."
"Other factors also matter. Higher inflation would aggravate the deficit’s impact on interest rates; lower inflation, a demand for bonds by an aging population or panicked investors would soften it."
"A recent study by the Penn Wharton Budget Model suggested that even though the U.S. controls its own currency, its debt would become unsustainable as it approaches 175% of GDP."
The second article is Fed Minutes Reveal Divide Over Size of September Rate Cut: While a ‘substantial majority’ favored the larger half-point reduction, some officials backed a smaller quarter-point cut by Nick Timiraos of The WSJ. Excerpts:
"Federal Reserve officials were divided at their meeting last month over how much to reduce interest rates, with a substantial majority favoring the larger half-percentage-point reduction that was ultimately approved, but others favoring a smaller quarter-point cut."
"The decision to lower the benchmark rate to a range between 4.75% and 5% was supported by 11 of 12 members of the Fed’s rate-setting committee. One policymaker, dissented against the decision in favor of a smaller reduction, and the minutes suggested her reservations may have been shared by other policymakers."
"But the Fed often prefers to make quarter-point changes to its policy rate because that gives officials more time to study the effect of their policy changes. [this is another example of the uncertainty-if they have to do this it means they are not sure what the impact of their policy will be] Indeed, the minutes revealed an unspecified number of officials had thought the smaller cut last month would have been warranted given solid economic activity, low unemployment, and inflation that is still above the Fed’s target.
A few officials thought the smaller cut “could signal a more predictable path of policy normalization,” the minutes said. Some officials who supported the larger cut indicated they could have also supported the smaller move, the minutes said."
"Officials agreed that the larger cut approved at the meeting shouldn’t be a sign of concern over the economic outlook or viewed as a signal that the Fed was prepared to rapidly lower interest rates"
"The Fed isn’t “in a hurry to cut rates quickly,” Powell said last week during a moderated discussion in Nashville, Tenn. If the economy slows down more rapidly than expected, “then we can cut faster. If it slows less than we expect, we can cut slower. That’s really what’s going to decide it.”"
Related post:
What are macro policy makers uncertain of? (2023) (It has links to 12 other WSJ articles)
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