Will interest rate cuts lead to 'stagflation'?
Will interest rate cuts lead to 'stagflation'?
Many believe the Fed now has no choice but to cut interest rates despite worries that doing so could fuel so-called "stagflation;" higher consumer prices and higher unemployment.
WASHINGTON - Many economists, educators and business executives fully expect the Federal Reserve to cut rates at least a quarter percent, if not a half percent, next week from today. Yet, some recent economic indicators suggest the Fed should be extremely careful before making that move.
Prices creeping up
What we know:
Over the last four months, year-over-year inflation has crept up to 2.9%, almost one percent higher than where Federal Reserve interest rate setters want it. "After promising to lower prices, to curb inflation on day one, his tariffs are raising prices and slowing the economy," said Senate Minority Leader Chuck Schumer.
Groceries 0.6%, the biggest monthly jump in almost three years. Gasoline reversed course by inching up again.
"I'm worried at the costs of going to the supermarket. I cannot see how we're not being affected by the negative things that are being done right now," said shopper Pat Cabezud.
Unemployment on the rise
At the same time, the number of folks applying for unemployment benefits last week, 263,000, is the highest in almost four years. That's on top of the 911,000 jobs that disappeared from revised federal job reports over the last year.
Health worker Ronald Mandigm is worried about his job.
"Oh definitely. Definitely. Job security is one of the things I'm considering as one of the most important things to me. I have to provide for my family. I have to feed my family," he said.
In short: though climbing inflation and evaporating jobs are the two things the Fed uses higher interest rates to guard against, it may be forced to cut rates next week.
"The inflation picture is not relevant to what the Fed's doing. Used cars are up because of tariffs. A lot of things are up because of tariffs. That has nothing to do with Fed monetary policy. The labor market's weakening. The Fed needs to cut," said David Bahnsen, Managing Partner of Bahnsen Group Wealth Management.
Cutting interest rates
The rate cut anticipation is rampant.
"In fact, we expect three rate cuts this year," said Origin Point lending expert Fif Ghobadian. She says home lenders had already dropped their rates from last week, some as low as 5.875%, assuring more buyers will qualify for loans. "The Fed is now motivated to bring rates down because that is the only way they can generate some activity and movement in the economy," said Ghobadian.
Beware of ‘stagflation’
Indeed, the stock markets soared Thursday, also believing the Fed now has no choice but to cut interest rates despite worries that doing so could fuel so-called "stagflation;" higher consumer prices and higher unemployment.
Back in the ‘70s, stagflation shook the U.S. economy to its foundations. "The rates that we reached in the ’70s that we called stagflation are still way above where we're at now, but that is the condition I think the Fed is concerned about," said employment lawyer and former EDD Director Michael Bernick.
You will be hearing about stagflation a lot in the coming months because inflation keeps inching up in a weak job market.
Featured
U.S. economy shrank in first quarter; first drop in three years
Economic growth in the first quarter was impacted in part by a rise in imports as U.S. companies attempted to bring in foreign goods amid the enforcement of tariffs.