The Federal Reserve is expected to announce its latest policy decision on Wednesday, but many analysts and investors are bracing for disappointment. The central bank is likely to keep its key interest rate unchanged at 5.5%, despite mounting pressure from both Wall Street and Main Street to ease monetary conditions amid slowing economic growth and rising inflation.
Why the Fed is reluctant to cut rates?
The Fed has been on a tightening cycle since March 2022, raising its benchmark rate by a total of 2.25 percentage points to combat the highest inflation in four decades. The rate hikes have helped cool down price pressures, but they have also increased borrowing costs for consumers and businesses, dampening spending and investment.
The Fed has signaled that it is close to ending its rate hike campaign, but it has not committed to any specific timeline or criteria for doing so. The central bank has said that it will be guided by the data and the outlook, and that it will act as appropriate to sustain the expansion and achieve its dual mandate of maximum employment and stable prices.
However, the data and the outlook have been mixed and uncertain lately. On one hand, the labor market remains strong, with unemployment at a 50-year low of 3.6% and wages rising at a healthy pace of 3.4% year-over-year. On the other hand, the economy has slowed down significantly, with GDP growth decelerating from 3.1% in the first quarter of 2023 to 1.9% in the second quarter. Moreover, inflation has remained stubbornly high, with core inflation, which excludes food and fuel prices, at 4.8% in June, well above the Fed’s 2% target.
The Fed faces a dilemma: if it cuts rates too soon or too aggressively, it could risk reigniting inflation and undermining its credibility; if it waits too long or too cautiously, it could risk tipping the economy into a recession and missing its opportunity to provide stimulus.
What Wall Street and Main Street want from the Fed?
Wall Street and Main Street have different expectations and preferences for what the Fed should do next. Wall Street, which benefits from lower interest rates and higher asset prices, wants the Fed to cut rates as soon as possible and as much as possible. Main Street, which suffers from higher inflation and lower purchasing power, wants the Fed to keep rates steady or even raise them further to curb inflation.
According to a recent survey by Barron’s1, 62% of money managers expect the Fed to cut rates by 25 basis points on Wednesday, while 38% expect no change. Only 7% of money managers think that the Fed should raise rates by 25 basis points or more.
The gap between Wall Street and Main Street reflects their different perspectives and experiences of the economy. Wall Street is more optimistic about the growth prospects and more worried about the downside risks, while Main Street is more pessimistic about the inflation outlook and more concerned about the cost of living.
How the Fed will disappoint both sides?
The most likely outcome of the Fed’s meeting on Wednesday is that it will disappoint both Wall Street and Main Street by keeping its rate unchanged at 5.5%. The Fed will probably cite the conflicting signals from the data and the uncertainty from trade tensions and global developments as reasons for its caution and patience. The Fed will also probably reiterate its readiness to act as appropriate if conditions change materially.
However, this outcome will not satisfy either side of the debate. Wall Street will be disappointed by the lack of stimulus and support for the markets, while Main Street will be disappointed by the lack of action and relief for the consumers. Both sides will question the Fed’s judgment and credibility, and wonder if the central bank is behind the curve or ahead of itself.
The Fed’s dilemma is not likely to be resolved anytime soon, as the economic outlook remains clouded by various factors such as trade wars, geopolitical tensions, fiscal policy, consumer confidence, business sentiment, and global growth. The Fed will have to balance these factors carefully and communicate clearly with the public and the markets about its rationale and intentions.
The Fed’s decision on Wednesday will be closely watched by investors, analysts, policymakers, media, and consumers around the world. The Fed will have a tough task of explaining its decision and managing expectations for its future moves. The Fed will have to disappoint some people no matter what it does, but it will try to avoid disappointing everyone.