Rate Cuts Stall, Economy Cruising as Trump Poised To Take Over

There is a growing conviction on Wall Street that short-term interest rates are near — and perhaps at — their lowest for the foreseeable future, the result of sticky inflation and a healthy economy that will greet President Trump as he begins his second term in the White House.Wholesale and retail price reports for December came in slightly better than expected, but with enough worrying details to dissuade investors from betting on significant overnight interest-rate reductions from the Federal Reserve’s current target range of between 4.25 percent and 4.5 percent. Only a few weeks ago, economists were expecting the range to fall by about a percentage point over the course of this year.This week’s data showed consumer prices rising 2.9 percent in December, compared with the corresponding month in 2023, while producer costs were up 3.3 percent. Both numbers are above the central bank’s target of 2 percent, which is based on personal-consumption expenditures. Energy costs and airfares notably higher in both reports, although these were partly the result of one-time factors and calendar vagaries that included a late Thanksgiving, according to the chief market strategist at Yardeni Research, Eric Wallerstein.Market response to the CPI was sharper, with stock prices sharply higher around midday on Wednesday and bond yields retreating. Still 20- and 30-year Treasury issues remain near 5 percent, according to CNBC data with the benchmark ten-year issue at 4.7 precent. That is up from 4.6 percent at the end of last year and 4.1 percent a year ago, Fed data show.Inflation has been an issue since the Covid pandemic, when the government and the central bank took steps to stimulate the economy. Consumer prices jumped 7 percent in 2021 and 6.5 percent in 2022, and producer costs were up 10 precent and 6.4 percent in those two years.After cutting interest rates to near zero during the pandemic, the central bank began pushing them back up in March 2022 to counteract the inflationary pressure, with its target zone reaching 5.25 – 5.5 percent in mid-2023. Last year, it brought the range down to 4.25 – 4.5 percent.Now, with jobs seemingly plentiful and inflation stubbornly above the Fed’s target, Mr. Wallerstein said there is little need for the Fed to provide further interest-rate relief. In fact, prices for goods have been lagging costs for services, after consumers stocked up on big-ticket items like appliances and automobiles during the pandemic lockdown, he said. The situation has been compounded by Communist China “exporting deflation” to combat weakness in its economy by selling manufactured goods at relatively low prices.Against that backdrop, further Fed rate cuts might accelerate goods purchases, Mr. Wallerstein said, bringing them more in line with the gains in services.Meanwhile, the outlook for government spending and borrowing is unclear. Trump’s campaign pledges to deport undocumented immigrants, increase tariffs — notably on imports from China — and reduce taxes, could add inflationary pressures. On the other hand, his plan to encourage expanded oil production would tend to lower energy prices, a key element of December’s inflation.The chief economist for LPL Financial at Charlotte, North Carolina, Jeffrey Roach, said by email that the CPI data “will likely force investors to wait until the second quarter for the next cut in rates. If enough households remain on solid financial footing, the economy will continue to grow and keep inflation pressures elevated.”Mr. Wallerstein said President Trump may be less insistent that the central bank pursue an easy-money policy than he was in his first term. One reason Trump won re-election last year was voter dissatisfaction with rising prices, and the new administration may be happy to let the Fed wage its anti-inflation campaign, Mr. Wallerstein added.The Fed is independent of the executive branch, but the president does get to nominate central bank governors and name its chair and vice chair from among them. In his first term, President Trump selected the current chairman, Jerome Powell, but then took issue with him over raising interest rates before the pandemic, reversing years of easy money that began with the Great Recession. Mr. Powell was reappointed by President Biden in 2022 to a term that ends in 2026, which will give Trump the opportunity to replace him.

Rate Cuts Stall, Economy Cruising as Trump Poised To Take Over

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