Fed Reserve Rates and Recession

Recently, former President Donald Trump has been vocal about his views on the Federal Reserve's interest rate policies. Trump has criticized the current high interest rates and suggested that if he were to be re-elected, he would pressure the Federal Reserve to lower them.

Trump and some Republicans believe a pre-election rate cut could unfairly benefit Democrats by improving economic sentiment.  So, they oppose a rate cut at the next Federal Reserve meeting in September.

This puts politics ahead of the immediate needs of the Economy.   I often find that Trump is thinking way ahead. It may be that he would prefer to let the Fed take us into a recession now which would almost guarantee his election.

However, a cut in Rates is needed to stave off from recession from the current economic declines under the Biden-Harris policies, if that is still possible.

Background on the Federal Reserve  (Also known as the FOMC or “the Fed”)

The Fed is an independent, self-governing body designed to avoid political influence. 

There are seven appointed members of the Board of Governors of the Federal Reserve System :

• They are appointed by the President of the United States and confirmed by the Senate.

• They serve staggered 14-year terms, which are designed to ensure stability and continuity over time.

The mission of the Federal Open Market Committee (FOMC) is to promote maximum employment, stable prices, and moderate long-term interest rates in the United States. 

The FOMC achieves this by setting the target range for the federal funds rate, which influences overall monetary and financial conditions, thereby supporting economic growth and stability.

Changes in the target range for the federal funds rate influence short-term interest rates for other financial instruments, which in turn affect the spending decisions of households and businesses. This creates implications for economic activity, employment, and inflation.

Current Situation

In January 2022, the Fed Rate was the lowest in history at 0.25% due to response required by the Covid induced economic downturn.

At the same time Biden-Harris radically increased Federal Spending to record highs.

The Economy naturally bounced back from the Covid downturn when businesses started to re-open and expand to pre-Covid levels.

The policies invoked were probably overkill and resulted in the highest inflation since the 1970’s, and a reduction in real wages for workers of over 10%.

As inflation rose, the Fed acted to raise the Target Funds Rate which now stands at 5.5% (compared to 0.25% in January, 2022).

Now, Inflation has fallen as the high Rates have had their effect, and economic activity has declined.      This presents a growing risk of Recession.

Following is a chart showing the trends in Rates and Inflation since January, 2022.

As inflation declines the Fed stubbornly holds onto an Inflation Target of 2%.

The Fed Policy has turned over-restrictive as inflation is now below the Fed Funds Rate.

What are the measurements that show a risk of recession ?

There are many but here are some key indicators.

O   GDP Growth has fallen to its lowest level in the last 18 Months.

  Quarter        GDP ($ Billions)           Percent Change Qtr Over Qtr,

Q1 2023	$    6,433	1.5%
Q2 2023	$    6,588	2.4%
Q3 2023	$    6,725	2.1%
Q4 2023	$    6,875	2.2%
Q1 2024	$    7,067	2.8%
Q2 2024	$   7,157	1.3%

Compare the latest 1.3% rate to the long-term Average of 2.8% (since 1980).

O   Consumer Spending has gone negative from the 2023 average per month compared to 2024 through July.

Year                     Average Spend Per Month ($ Billions)

2023                    $ 2,298

2024 YTD           $2,243

O   New Jobs have been falling for the last 5 Months.

The unemployment rate for July 2024 rose to 4.3%, up from 2.9% in June, a dramatic increase.  The economy added only 114,000 jobs, which was below economists' predictions of 176,000 jobs.

O   The Stock Market has reacted to the economic weakness with fears of recession.  Major averages have fallen by 6% to 13% over the last 3 weeks.

SUMMARY

The Federal Reserve should reduce Market Rates by at least 0.5% at the September meeting, or sooner.

Trump may prefer to let the recession happen and take credit for the ensuing recovery after his election.

David Hollaender

August 5, 2024

Cogport.com