Is inflation cured? Fed’s giant rate cut turns focus to cooling job market

The Federal Reserve wants you to think inflation is largely cured, so it can go tinker with a soft job market.

The central bank on Wednesday, Sept. 18, trimmed its target for its Federal Funds rate by a half-percentage-point to 4.74% to 5%, its first cut in four years. This is no minor policy tweak. Since 2000, rate cuts of this size were previously made during the pandemic lockdowns in 2020, the global financial collapse of 2007-08, and the dot-com crash of 2001-02.

And while Wall Street traders and borrowers may rejoice at the news, not everyone is thrilled that the Fed zapped its tight money policy.

Mark Schniepp, the economist from Santa Barbara behind the “California Economic Forecast,” doesn’t think the economy is weak enough to need such a significant boost.

Until this move, the Fed used high rates to cool the once-overheated economy. You might recall that in March 2022, the Fed began a battle against four-decades-high inflation with pricier financing. Pushing short-term rates swiftly from roughly zero to above 5% throttled the economy – statewide and nationally – back to moderate growth.

To Schniepp’s eyes, however, the business climate remains “too strong” to justify this level of Fed help. One estimate of the nation’s current gross domestic product growth is at 2.9% – a typical expansion rate.

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Now, California’s workers should be pleased that the job market is the major concern of central bankers. In California, employment is growing at a 1%-a-year rate – which is fairly reasonable to Schniepp, “considering there’s not much of a housing market.” The real estate business has mostly been put on ice due in part to lofty mortgage rates that recently peaked at highs not seen in two decades.

Schniepp suggests California job growth would be better if employers statewide had more qualified candidates from which to choose. Lower interest rates won’t alter that shortage.

The economist notes that Fed officials seem concerned about rising unemployment. California’s jobless rate has been above 5% for 10 months, after hitting a historic low of 3.8% in August 2022. Yet, California’s average unemployment rates since 1976 is 7.2% – so it’s fair to say that current levels are historically modest.

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It’s California shoppers who should be antsy.

Schniepp worries the budget-busting inflation the Fed was fighting has not been sufficiently muted.While numerous price benchmarks are relatively near the Fed’s previously stated goals, even the central bankers admit that problematic cost-of-living-challenges remain.

Remember, the Fed has a “dual mandate” – helping to manage national prices and employment.

The cheaper financing created by the Fed’s cut on Wednesday will certainly give the economy a boost, Schniepp says. And the overall economy that should look significantly more robust by the middle of 2025, the economist predicts.

Still, what about inflation? A reheated economy will boost prices, he says. Plus, huge government deficits and the borrowings required to fill those financial gaps will put upward pressures on inflation and interest rates.

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Schniepp sees the big Fed cut as perhaps “symbolic” – a signal that the bank “is willing to help” before things get ugly. Still, the economist concludes, “we don’t need this kind of stimulus.”

Jonathan Lansner is the business columnist for the Southern California News Group. He can be reached at jlansner@scng.com