If inflation rises, forget about the interest rate cut in September

The views and opinions expressed are solely those of the author.

After the Federal Open Market Committee meeting last week, Fed Chairman Jerome Powell seemed to suggest that while we left interest rates unchanged at that meeting, rate cuts were likely of interest in September. With the latest weak jobs numbers, Wall Street is predicting a near 100% chance of a rate cut in September. Will they be cut?

The consumer price index (CPI) figure for July will be published on August 14. It looks like this figure could show a slight increase from the previous month, pushing the one-year CPI higher. The August CPI number will be released in mid-September. Although it is too early to forecast this number, it could also increase.

If that is the case, then the Fed will not cut interest rates at its September meeting. This means that the earliest interest may fall in November.

Virtually all Americans want interest rates to fall. Businesses need lower rates to grow their businesses and increase their hiring. Consumers need lower rates so they can afford to buy big-ticket items like houses and cars. And households need lower rates, so their credit cards aren't as expensive.

After two very costly mistakes, the Fed does not want to make another mistake in dealing with inflation.

Their first mistake was to keep interest rates close to zero and rapidly expand the money supply throughout 2021 and the first half of 2022. They did this while the annual inflation figure rose from 1, 4% in December 2020 to 9.1% in June 2022.

His second mistake was to end interest rate hikes in September 2023. This end kept the Fed Funds rate in the 5.25 to 5.50 range. If they had raised interest rates one or two more times before the end of 2023, inflation would not have risen as it did in early 2024.

Next September, the Fed will face a dilemma. Persistent inflation should mean they keep interest rates steady. But the economy is starting to slow and the unemployment rate has risen to 4.3%, so if the Fed keeps rates steady, the economy may weaken further and unemployment will rise further .

In the first quarter of this year, annual GDP growth was a minuscule 1.4%. The first estimate of GDP growth for the second quarter is a very healthy 2.8%. However, with the unemployment rate rising, estimates for third quarter GDP growth have fallen.

The consensus view is that GDP growth will fall to less than 2% in the third quarter. Some economists forecast a GDP growth rate in the 1% range. This level of growth will push the unemployment rate to 4.5% or higher.

According to the Bureau of Labor Statistics, there are currently 7.2 million Americans unemployed. Last July there were 5.9 million. The increase of 1.3 million corresponds to the Fed, meaning they would like to cut interest rates to prevent this number from increasing.

But if they cut rates too soon, it will be a costly mistake in their battle to reduce inflation, which has been a problem for more than three years. Inflation has reduced the standard of living for nearly all Americans, especially the middle and lower classes.

At this point, reducing inflation should remain his top priority even if it results in a further increase in the unemployment rate. After all, a 2% increase in unemployment means about 2.5 million Americans will lose their jobs. But a further increase in the inflation rate negatively affects nearly all 132 million US households.

When the Federal Open Market Committee meets again in September, we could have seen a rise in the inflation rate and a rise in the unemployment rate. The Fed has a tough decision to make. Based on history, the Fed will likely err on the side of keeping interest rates higher to continue the fight against inflation.

That is, of course, unless your decision is influenced by politics. In this case anything could happen.

Dr. Michael Busler, Ph.D. is a public policy analyst and professor of finance at Stockton University, where he teaches undergraduate and graduate courses in finance and economics.

Last messages from Michael Busler (see everything)

We have zero tolerance for comments that contain violence, racism, profanity, profanity, doxing, or rude behavior. If a comment is spam, instead of replying to it, click the ∨ icon below and to the right of that comment. Thank you for engaging with us in a fruitful conversation.