The end of an economic era
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At precisely 2 pm Wednesday, in a windowless ground-floor room in Washington's Foggy Bottom neighborhood, dozens of packed-in economics journalists will hit "send" on reports that the Federal Reserve has decided to cut interest rates. With that, an economic era will end.
Why it matters: The defining economic feature of the last four years has been the onset of the highest inflation in modern times, followed by the Federal Reserve's efforts — late, but aggressive — to bring it to an end. That chapter in America's economic history ends this week.
- But the question of what comes next is less clear. The U.S. job market has shown mounting signs of weakness in recent months, including a rise in the jobless rate from a modern low of 3.4% last year to 4.2% in August.
- Indeed, that softening may be enough to prompt the Fed to enact an extra-large half-percentage point rate cut this week instead of its usual quarter-point move. The decision currently looks like a coin flip.
State of play: Beyond this week's tactical decision by the central bank, it looks like the era of very low mortgage and other rates that prevailed in the 2010s isn't coming back.
- Fed officials, as of June, anticipated that their target interest rate would be 2.8% in the longer run. That's higher than it was at any time from 2009 through 2021.
Flashback: This has been an economic cycle unlike any in modern memory, as the unique dynamics of a post-pandemic economy — global supply disruptions, labor shortages, massive fiscal support — broke the usual rules of thumb for how the economy works.
- There were widespread predictions that the Fed's aggressive interest rate increases — 5.25 percentage points worth between March 2022 and July 2023 — could only bring inflation down by causing a recession.
- Bloomberg economic modeling in 2022 put 100% odds on a recession by October 2023. Former Treasury Secretary Larry Summers said in 2022 that bringing inflation down would require an unemployment rate of above 5% for years.
By the numbers: Instead, the inflation descended from its modern high of 9% in the 12 months ended June 2022 to 2.6% in the last year, against a backdrop of a solid job market.
- What had been an overheated job market in 2021 is in balance — through more people entering the workforce and from companies trimming their number of job openings — not, for the most part, from layoffs.
- The Fed's rate hikes triggered a swoon in the stock market in 2022, a freeze-up in the housing market, and a regional bank crisis in March 2023. But none of these were enough to knock the mighty U.S. economy off course.
Yes, but: The predominant risk the Fed is dealing with now is that the job market cooldown keeps going to the point of turning decidedly cold, which would mean that the central bank waited too long to begin cutting rates.
- "We do not seek or welcome further cooling in labor market conditions," Chair Jerome Powell said in Jackson Hole, Wyoming last month.
- But just because they don't want it doesn't mean they won't get it.
