Trending Now
We have updated our Privacy Policy and Terms of Use for Eurasia Group and its affiliates, including GZERO Media, to clarify the types of data we collect, how we collect it, how we use data and with whom we share data. By using our website you consent to our Terms and Conditions and Privacy Policy, including the transfer of your personal data to the United States from your country of residence, and our use of cookies described in our Cookie Policy.
{{ subpage.title }}
Federal Reserve Board Chair Jerome Powell holds a press conference following a two-day meeting of the Federal Open Market Committee on interest rate policy in Washington, U.S., September 18, 2024.
US Fed cuts deep
The US Federal Reserve lowered interest rates by half a point on Wednesday, an expected cut but surprising in size, coming in bigger than many anticipated. Its target range is now 4.75% to 5%.
The cut was the first from the Fed in four years — and more could be coming. In August, the inflation rate was 2.5%, a significant drop from pandemic highs. In May of 2022, inflation hit 8.6%, the highest rate since 1981.
Fed Chair Jerome Powell said that growth was proceeding at a “solid rate” and that he didn’t expect an economic downturn.
Ahead of the decision, Former President Donald Trump opposed the cut, suggesting it was a political move, coming so close to an election. The decision was taken at a routine, scheduled meeting of Fed governors and independent of any electoral considerations, a common practice even in an election year. Many Republicans agreed with the decision to lower rates, and Powell said the effects would take time to move through the economy — beyond the November vote.
The cut is a sign that inflation is shifting back toward pre-pandemic levels in the US — and the Fed is not alone. In early September, the Bank of Canada cut its key rate t0 4.25%. This marked the third reduction in a row, with more, possibly bigger cuts, expected. In August, the price of goods and services in Canada ticked up just 2%, the lowest rate in nearly three and a half years and in line with the Bank’s target.
Lower inflation is good news for consumers on both sides of the border who’ve faced high and growing prices for years. The cooling inflation rates will drive calls for more central bank interest rate cuts, which are increasingly expected to follow.
The Bland Bombshell and the Big Banks
Is there anyone more bland, more powerful, and less recognizable than Federal Reserve Chair Jerome Powell? He makes money moves more than Cardi B, and yet most people wouldn’t recognize him if he were sitting on their lap in the subway.
Why do relatively obscure banker meetings matter? Fair question, and it’s precisely why our GZERO team in Washington, DC, is covering the IMF-World Bank spring meetings this week.
For Masters of Monetary Policy like Powell, being bland is a strategy, not a characteristic. They speak in a purposely arcane language that requires near Bletchley Park decoding powers because everything they say makes news that impacts markets. This, in turn, affects things like your mortgage, your investments, and your grocery bill. It also impacts global poverty, which ought to make a lot more news. So understandably, they have to be careful and neutral to avoid panics or bouts of enthusiasm and ensure their signals leave lots of room for interpretation. But don’t mistake bland for lack of consequence. In global banking, bland is the brand, but influence is the purpose.
What have you missed so far?
Powell had a major bland moment at the Wilson Center’s Washington Forum on the Canadian Economy, which coincides with the spring meetings, where he hinted he would delay dropping interest rates because US inflation is proving more stubborn than predicted. “The recent data have clearly not given us greater confidence and instead indicate that it’s likely to take longer than expected to achieve that confidence,” he said, as the finance world listened to him emphasize every SYL-la-ble.
Then, in case anyone missed it, he took out the verbal highlight pen. “We can maintain the current level of restriction for as long as needed.” Whoa. Treasury yields moved higher that very moment, and he wasn’t even done speaking. Translation for those not steeped in Bland Banker Speak: Interest rates are gonna stay higher for longer – at least until the inflation rate hits the target goal of 2%. Govern yourselves accordingly.
That news got a tiny corner of social media all ginned up, giving us the world’s first – and perhaps last – Federal Reserve Meme: Check out this AI-generated Jerome Powell hyped on rate cuts. Maybe Blands really do have more fun.
Meanwhile, Bank of Canada Gov. Tiff Macklem, who was on the same panel with Powell, hinted he might go in the other direction – and having had many conversations with him over the years, I can say that Macklem isn’t bland at all. Just last week, he held the key interest rate at 5% because inflation had centimetered up a titch, but he still suggested a rate drop was “within the realm of possibilities” as early as June.
What would that mean? For one, if Canada drops rates faster than the US Fed, the Canadian dollar would likely weaken considerably, so depending on which way you travel, things could get either a lot cheaper or more expensive.
In short, everything central bankers say makes a difference to millions of citizens, and still, most folks only pay scant attention to talk about inflation and interest rates close to home – not internalizing how much impact these decisions have on major issues like global poverty. For example, GZERO’s own Matthew Kendrick has been reporting from the spring meetings this week, covering the impact of inflation on the most vulnerable economies like Somalia and what is being done to help. You can read his surprising look at the Somali success story on debt reliefhere.
But if world bankers are all so smart, why are one in three countries worse off than in 2019? Why are so many falling back into poverty post-COVID? To find out, our Head of Content Tony Maciulis sat down with Ayhan Kose, the World Bank Group’s deputy chief economist, who told him, “When the food price goes up, the price of oil goes up. That has significant implications for these economies.” He also noted that some countries have experienced “the weakest growth rate on average since the 1990s.” What are the solutions? Watch Tony’s interview here.
News about IMF and World Bank financiers doesn’t often make the front page because it’s so complex, often depressing, and … well, kinda bland. There are other riveting events, like Donald Trump’s first criminal trial, the war in Ukraine, and Iran launching missiles at Israel to grab our attention, as they should.
But spare a moment for the folks who live in Blandlandia – those people at the IMF and World Bank spring meetings. They are participating in panels like “The Path for Taxing the Super-Rich – Towards a Progressive Global Taxation Agenda,” “Biden Pauses LNG; COP 28 Fossil Fuel Phase-Out Decision – Is World Bank Lagging on Fossil Fuels?” and even “The Polycrisis – How Unchecked Public Debt Fuels Corruption and Bad Governance.”
Beneath the bland, the story of our world unfolds. Since 1944, when both financial institutions were established, the World Bank itself has funded over 12,000 programs focused on economic development and reducing poverty. Has it worked? The record is mixed.
There have been big wins – like the reconstruction of Bosnia after the war, or working on debt relief programs, like Matt described in Somalia. But the World Bank also set a goal of eliminating extreme poverty by 2023, and its leaders admit they are not even close.
Meanwhile, the IMF, whose mission is to “firefight” big, macro-economic emergencies, like a currency collapse, comes in for much harsher criticism. Its Structural Adjustment Programs – loans to low-income countries in distress – have been subjected to extensive research, often proving that they have kept people in countries like Zimbabwe or across Latin America in poverty while enriching investors. Are these Western-designed programs just a neo-liberal form of colonialism, as some suggest, or pragmatic ways to get countries onto the path of economic development? The debates are so divisive that China has moved into the space in countries that no longer trust the IMF, using its Belt and Road Initiative to invest in infrastructure and push its own influence. So, politics are driving this as well.
The IMF and World Bank may not always make things better, and there is even paranoia right now that Donald Trump, if he wins in November, might withdraw the US from the World Bank, which would devastate developing economies. Still, these two organizations are relevant and demand our attention.
At GZERO, we are committed to covering these topics and making them accessible and interesting. So please tell us what you think. If you have suggestions for things we ought to cover, or questions about events like the IMF-World Bank spring meetings, send us a note here, and we will post answers to some of your key questions next Thursday.
Thanks for your remarkable attention to all these matters, and now, let’s get at the rest of the news.
– Evan Solomon, Publisher
Federal Reserve Chair Jerome Powell testifies to the Senate Banking Committee in Washington, DC.
Central bankers forecast clouds, with a chance of rate cuts
The millions of homeowners who have seen their mortgage payments double in recent years would no doubt concur with Mark Twain in his assessment of bankers – as the type of people who lend you an umbrella when the sun is shining and want it back as soon as it starts to rain.
Hopes for a break in the monetary policy clouds were frustrated this week as two North American central bankers said that interest rate cuts remain some way off.
Tiff Macklem, governor of the Bank of Canada, said yesterday that the bank’s governing council decided that rates will stay at 5%, at least until it meets again in April, as inflation of close to 3% means underlying pressures persist.
“We need to give higher interest rates more time to do their work,” he said.
The same day, Jerome Powell, chair of the Federal Reserve, told members of the House Financial Services Committee that the Fed is on a “good path” to achieving the desired “soft landing” of a growing economy with inflation back to its 2% target but that further progress is not assured.
The notes of caution come despite both US and Canadian economies avoiding recession. The US economy grew at an annualized rate of 3.2% last quarter. Even Canada’s anemic 1% growth rate suggests monetary policy is working to relieve price pressures, without choking demand.
Macklem said he is confident rates are high enough and that the discussion has now shifted to whether they need to stay at their current level.
Both central bankers characterized future progress as gradual and uneven, as wage growth remains in the 4-5% range.
But the unspoken pressure is political. A Liberal government in Canada will hand down a federal budget on April 16, less than a week after the next governing council decision. The budget date all but rules out the central bank's April meeting as a possibility for a rate cut, given the prospect of inflationary federal government spending.
In the US, it is an election year, which puts inevitable pressure on the Fed from politicians who will have to face angry voters. Powell said he acknowledged the risks of waiting too long to ease monetary policy and the damage that might cause the economy. But he said he did not want to ease credit conditions too soon and see inflation re-accelerate.
Investors expect an initial rate cut in June. Fed officials last year projected three quarter-point cuts this year, but Powell said the Fed would like to see more data to increase confidence that inflation is moving down to 2% before reducing the policy rate.
The benchmark rate has been held in the 5.25-5.5% rate since July.
For cash-strapped homeowners and consumers, the post-inflation rainbow can’t come quickly enough.
Federal Reserve Chair Jerome Powell looks on at the Jackson Lake Lodge in Jackson Hole
What’s the Fed’s next move?
It’s a tricky moment for the global economy. Growth is slowing around the world – particularly in China. The regional US banking crisis earlier this year sowed fears that further rate hikes could destabilize the industry. And inflationary pressures around the world – especially for food – are sending prices north, thanks to climate change and the war in Ukraine.
Powell is expected to strike a more optimistic tone this year – but not a triumphant one. After a year of 11 rate hikes (interest rates are at their highest levels in 22 years), the Fed has made significant progress in easing annual inflation, reducing it from 8.5% this time last year to today’s 3.2%. But it’s still higher than the Fed’s 2% target – and there are fears that high consumer spending will keep translating into higher prices. But there is also murmuring of the Fed pulling off a “soft landing,” where it manages to tame inflation without tanking the economy.
Consumers are burning through the last of their COVID savings, so the consumer spending problem could solve itself. Monetary policy takes time to ripple through the economy, but Powell needs to decide how patient the Fed can afford to be.
Rob Kahn, director of Eurasia Group’s Geoeconomics practice, expects the Fed to pause their rate hike cycle in September. But today Powell is likely to leave the door open for additional rate hikes and signal a willingness to maintain the Fed's tight monetary policy well into 2024.
But come November, Kahn anticipates one more 25-basis-point hike and says that the first cuts are only likely to come in mid-2024 as the Fed continues aiming for the holy grail of 2%.
Fed chair Jerome Powell leaves after a news conference in Washington, DC.
The Fed's last rate hike of 2023?
On Wednesday, the US Federal Reserve will announce whether it'll further raise interest rates to tamp down inflation, which has eased in recent months yet remained at 5% in March, well above the 2% level that economists like. It's likely that the Fed will go for another 0.25 percentage point hike — taking interest rates to between 5% and 5.25%, the highest level in 16 years.
But that's not what economists and investors will most pay attention to.
They will surely obsess over every word that Fed Chair Jay Powell says in his speech after the rate decision is announced — looking for any signal that it’ll be the last hike of 2023. Yet, don't be surprised if Powell keeps his cards close to his chest amid stubbornly high inflation, fears of a looming US recession, and financial sector jitters after the collapse of First Republic Bank.
"Our base case is that the Fed will pause there and hold that rate through to at least the end of the year," says Eurasia Group analyst Robert Kahn. "But it'll be interesting to see how the Fed handles it. They're not going to want to give any kind of assurances."
Traders react to Fed rate announcement on the floor of the NYSE in New York.
US economy’s slowing growth
The US economy grew by just 1.1% year-on-year in the first quarter of 2023, suggesting that the Federal Reserve’s tightening of monetary policy to stamp out inflation is indeed slowing down the biggest economy in the world.
It’s a big drop from the 2.6% growth rate recorded in the last quarter of 2022 and suggests that the Fed’s spree of interest rate hikes since last year — raising the benchmark policy rate from around zero to 5% — is starting to have an impact despite consumer demand, which had so far remained strong due to a tight labor market and steady wage growth.
Ahead of next week’s policy meeting, Fed Chair Jerome Powell will be weighing up whether to keep tightening or to hit the brakes so as not to send the economy into a recession.
But there are still many unknowns on the horizon, including a looming crisis in Congress over raising the debt ceiling that could send markets into a tizzy, as well as more fallout from the ongoing banking crisis. This comes as many analysts, including Fed officials, say that the US will enter a recession later this year before the economic recovery can begin.
Larry Summers explains the banking crisis
On GZERO World, Ian Bremmer and former US Treasury Secretary Larry Summers discuss a range of topics, including the global banking system, the impact of AI on the labor market, and a controversial solution for rebuilding Ukraine.
Summers, an expert on inflation, provides valuable insights into recent bank failures that have caused concern among investors worldwide. He discusses whether the current situation constitutes a banking crisis, explores the role that inflation is playing in contributing to the banking problems, and makes predictions about the duration of the current financial turmoil.
He and Bremmer also touch on the impact of AI on the labor market, with Summers warning of significant changes that will cause profound shifts in traditional hierarchies and ways of thinking, which may make influential groups uneasy.
Summers also offers a provocative solution for rebuilding Ukraine: seizing frozen Russian assets.
Note: this interview was featured on an episode of GZERO World with Ian Bremmer on April 3, 2023: The banking crisis, AI & Ukraine: Larry Summers weighs in
Getty Images/Chip Somodevilla
Podcast: Larry Summers breaks down the banking crisis
Listen: On the GZERO World podcast, Ian Bremmer and former US Treasury Secretary Larry Summers discuss the recent bank failures that are disrupting global markets and worrying investors worldwide. They discuss whether the current situation constitutes a banking crisis and explore the role of inflation in contributing to the problems. As an inflation expert, Summers provides valuable insights and predictions on the duration of the financial turmoil.
Additionally, he warns of the significant changes that AI could bring to traditional hierarchies and proposes a controversial solution for rebuilding Ukraine: seizing frozen Russian assets.
Subscribe to the GZERO World Podcast on Apple Podcasts, Spotify, Stitcher, or your preferred podcast platform, to receive new episodes as soon as they're published.- Podcast: Inflation nation: How Larry Summers predicted skyrocketing prices in the US ›
- Podcast: Making sense of global inflation, looming recession, & economists who disagree ›
- Podcast: China's economic head start & a world accelerating into recession ›
- Podcast: The COVID-damaged global economy surprised Adam Tooze ›
- Ian Explains: Banking turmoil and the panic pandemic - GZERO Media ›