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Decoding the Fed's interest rate cut

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The Federal Reserve is shifting its focus from inflation to a slowing job market, signaling the start of a new economic era. This week on What's at Stake, hosts Bryan DeAngelis and Ylan Mui talk to Neil Irwin, chief economic correspondent at Axios, about the impact that the Fed's first rate cut in four years will have across the economy—and perhaps even on the November elections. 

Bryan DeAngelis:

Welcome to this week's episode of what's at Stake. We're your hosts. Brian DeAngelis, a partner here at Penta.

Ylan Mui:

And I'm lan Mui, a managing director at Penta.

Bryan DeAngelis:

And we're joined today by a special guest, Neil Irwin, chief economics correspondent at Axios. Neil, you've been following the Federal Reserve closely for years and there's certainly a lot to talk about. Welcome to the podcast. Thanks for having me. It's great to have you. It's a perfect time to have you. We seem to be at an inflection point for the economy, as evidenced by the fact that the Federal Reserve cut its benchmark interest rate by a half a percentage point last week. This is the first cut we've seen in four years and there was some debate leading up to it. Would they do a quarter, Would they do a half? And it's certainly made a lot of news since then. So it does feel like the Fed is shifting from fighting inflation to addressing concerns about the slowing job market and economic momentum. But, Neil, you covered this a lot closer. How do you interpret this move?

Neil Irwin:

I think you're exactly right. You know, for the last three years the story has been inflation took off in 21 and 22. The Fed belatedly but aggressively you know aggressively raised interest rates, starting in early 22 to try and combat that. And we've been living in that world ever since. We've been living in a 5.5% interest rate environment which, yeah, isn't as high as it was back in the 80s and 90s, but it's still, by modern standards, a very high rate. And we've been dealing with the consequences of that, whether that's frozen up housing markets, the stock market drop that happened in 22,.

Neil Irwin:

A lot of layoffs in the tech sector, bank failures back in spring of 23 that almost caused broader problems. Now we're in a different moment and I think this week, this past week, has been a real juncture in that transition and, as you say, inflation has been coming down. We're not quite to the 2% Fed target, but we're well on our way there. We're about there and the job market really is showing some kind of warning, yellow signs of faltering, and we can talk more about those if you like. But we're not in a crisis moment for the job market, but the Fed's trying to get ahead of that risk. They have to look around the bend and around the bend, inflation really isn't that big a risk. The job market is.

Ylan Mui:

Neil, you said that the Fed moved aggressively but perhaps belatedly in raising interest rates. I think a lot of folks were surprised again as Brian mentioned by the size of the Fed's rate cut and that kind of begs the question did the Fed move aggressively but belatedly to make that first cut? Could it have gone at a more perhaps steady pace if it had started a little bit?

Neil Irwin:

earlier. I think Jay Powell, the chairman of the Fed, basically acknowledged that in this press conference. He was asked did you make a mistake not cutting rates in July? And he acknowledged if they had had the jobs report for July a few days earlier, before that decision, it might have gone a different way, and I think that's as close as a Fed chair is going to come to admitting. Yeah, we maybe ended up a little bit behind the curve because the data hadn't quite shown what we needed to see to move.

Neil Irwin:

You know it's basically in September in this decision they just made. You got to mulligan, you know, and doing 50 basis points is basically doing the July cut and September cut in one fell swoop. But all the signaling was that they're not going to keep doing 50 basis points at a meeting. They're not going to keep up with this pace. They'll probably do if you believe what Hal's saying and what's in the economic projections released they'll probably do another quarter point at the two remaining meetings this year, four cuts of a quarter point next year. That's where their forecasts are Now. That's the kind of forecast you get in a non-crisis, non-recessionary situation. If things stay basically okay, they can adjust interest rates on that path. If things really start to go off the rails, then they'll go off the stops and go back to aggressive cuts.

Bryan DeAngelis:

Yeah, I'd love to double down there a little bit, because he did talk in his remarks a little bit about his concerns on unemployment, as you mentioned, and whether it's the Saham rule or others. There's been kind of flashing warning signs that you know that the soft landing may have a little bit of a bump and we may be looking at some minor recession or something. It looks like they're going to keep up cuts to try to stay ahead of that. But what are you expecting, especially with the election and some other things that could maybe not crisis but really knock the economy around a little bit?

Neil Irwin:

Yeah, look, the labor market. It's a tricky thing to describe and how to calibrate your level of alarm about what's going on. I think, frankly, I'm a little more worried about it, about the state of the labor market, than the Fed is if you take at face value the things they say in speeches and on the record. I think this half point cut is a sign that behind the scenes they might be a little more alarmed than they let on. But anyway, so what are we talking about here? All right, the unemployment rates recent low was 3.4% back in the spring of 23. It started the year as 3.7. We're now at 4.2. No-transcript, that's based on the 11 business cycles we've had since we had modern employment data. That's not a huge sample. Things can be out of sample. That doesn't necessarily apply this time, but it's a thing to watch what's happening beneath the surface of the job market the jolts, the job openings and labor turnover survey.

Neil Irwin:

The hiring rate has come down a lot and it's now about half a point below where it was in 2019, which I think we can all acknowledge is a pretty good job market. The openings rates come way down. We're going to be at the point on the beverage curve. This is the relationship between job openings and the unemployment rate, where I actually asked Jay Powell about this yesterday. Are we at the kink in that curve, meaning until now, job opening companies have reduced job openings but not laid people off. Can that go any further? Or now to get further job openings cut? Basically, are we headed towards more layoffs and higher unemployment? So these are all things that are not true things, and we're not in a recession now and we're not in a crisis now, but if things do deteriorate further, we've seen the writing on the wall of where they could be heading.

Ylan Mui:

And you see that too, reflected not just in the macro data that you referenced, neil, but also in some of the more micro or anecdotal data. The Business Roundtable survey that came out recently showed that CEOs are sort of cooling their plans to hire employees, and that's been a trend that they've been reporting for a little while now. And so, to your point, companies are maybe uncertain that the demand that they've seen in the post-pandemic world that we've gotten used to is really going to be there and really be sustained, and so they're tempering their hiring plans as a result.

Neil Irwin:

Yeah, and I've picked up the same anecdotal stuff, not just from surveys like this roundtable, but talking to people who are involved in helping young people find jobs recent graduates or current undergraduates that the market for people coming out of college is just way tougher than it was even one year ago in terms of finding that first job. Again, none of this is. This is not 2009,. Right, this is not the kind of recessionary, really glum job market that we've had at times in our lifetimes, but it is something that Ben and PayPal need to be paying attention to, and whoever wins the election in November will be inheriting one way or another.

Bryan DeAngelis:

Neil, kind of a follow up there. I'm just curious both, maybe from a media perspective, but even policymakers. I mean, 2009 is just the reference point for most people, that's what they've lived their professional career through. Do you see overreaction and hype even around some of these questions, Because that's the only thing they have to connect back to?

Neil Irwin:

So, yes, I mean, there's a thing I say sometimes to my colleagues who are newer to writing about this stuff. First of all, not every bad thing that happens in the economy causes a recession. Second, not every recession is as bad as 2009,. Right, you know, because the last two recessions were uniquely horrible 2008 crisis and then the 2020 pandemic. Those initial few months, those are not normal recessions. 2001 is a more normal recession. 1991 is a more normal recession. Those were bad. Ilan and I lived through a one in the media business, no less, which was not a great place to be. It's, you know, it's not like it's fun, but it's not the same, as there are no jobs out there anywhere. There are, you know. You get to eight, nine, 10% unemployment, you know. So the question is this is not necessarily going to be a recession. I'm not predicting that, but if we do get up to five, five and a half 6% unemployment, that would be a very negative outcome for millions of people. Not what we want to see, but not as bad as 08 or 20.

Ylan Mui:

Yeah, no, I'm just going to say, though, brian, we just all dated ourselves really badly.

Ylan Mui:

I was going to say Because the other component is, neil, you talk about, you know, discussing the job environment in the labor market with, you know, with people who are coming out of college or looking for their first job, or maybe even just that second job. The financial crisis for them is a distant memory. They were still in school at the time, and so the volatilities around COVID, and then now seeing this dramatic bounce back, but now this softening that they're maybe not really sure where it's going to go, and that feels unsettling, I think, to a lot of workers.

Neil Irwin:

It does. And one thing to keep in mind look, the labor market of 2021 and 22 was not normal. It was the great resignation, Remember. Workers were uniquely empowered in ways that had some benefits. There's no question. There are people who hadn't had a raise for a long time who suddenly either switched jobs, got a better job, got rid of a bad boss, got a raise. Companies stepped up their benefits, stepped up their pay packages Even in the organized labor sphere, auto workers, the UPS workers, got very good deals. So it felt like there were no benefits to the 21-22 super hot job market. But it also coincided and contributed to that inflation that nobody enjoyed. Can we find that happy medium and just have a nice 4% and change unemployment rate for a few years and 2% and change inflation for a few years and just have everything get back to normal and be normal for a few years? That would be amazing. The question is, can we level out at that kind of level and have that rather than this whipsawing from one extreme to the other?

Bryan DeAngelis:

Yeah, and I think that's probably the same on rates as well. You know, we're probably not going back to a world because we were going through a pretty unprecedented crisis where it's, you know, a 2% rate. He's probably aiming back towards, I don't know, three and a half or so, like they'll be steady, but we were in a pretty extreme time coming out of COVID where those you know, if you've got your house at 2.5%, consider yourself lucky. I think we'll end up in more of a balance next year.

Neil Irwin:

Yeah, I think that you know the conventional wisdom, both within the Federal Reserve, among outside economists, is that the ZERP era, the zero interest rate lower bound era, is over for good, that this period from basically December 2008 to early 2022, the federal fund started rate was under 2.5% that entire time period. If you look at the Fed projections that just came out, the long-term Fed funds rate that the consensus is on that committee is 2.9%. So they're now expecting even once we get through this rate cut cycle. The long-run target rate of their policy rate is basically 3%, substantially higher than it ever was for that 15-year period, so 14-year period.

Neil Irwin:

So that's a sign of again, nobody knows for sure what the world, what the future, will hold. But the smartest people on this stuff really suspect that we're just not going back to very cheap money.

Ylan Mui:

Okay, so I feel like we've been talking a lot about the potential for recession and the weakness in the economy, but the whole point of cutting rates is to, you know, put a little bit more, add a little more fuel to the fire. So, neil, what are some ways that the Fed's interest rate cut might impact households, consumers? You know what are some of the bright sides for them as they think about this new era that we're in?

Neil Irwin:

Well, some of them we're already seeing. So bond markets move in advance of what the Fed's going to do, and so over the last few months, as the data has been coming in in ways that support rate cuts, bond markets, long-term yields, have fallen. So have mortgage rates. Mortgage rates now more like 6%. They were up around 8% not that long ago and we've seen that. Just this past week we got some housing starts number that showed a sharp surge in housing starts and permits in August. That's good news. We just got existing home sales today Same thing. So we're already getting the housing market that's been kind of limping along with this high rate environment lock-in effects from earlier mortgages. It's showing some new life and so that's a potential source of growth that might help keep us out of a downturn Similar with financial markets.

Neil Irwin:

Right, the stock market as of the moment we're recording this was hitting a new high and that's been fueled by this rate cut expectation as well. That creates a lot of benefits. That creates wealth effects. That makes people feel richer, at least those who do have stock investments. It makes the cost of capital for companies lower. It makes it easier for companies that are rolling over debt to do that and not have onerous terms. And then just the mechanics of if you have variable rate debt, if you have credit card loans, if you have any kind of variable rate loan, if you're thinking about buying a car, you have a more favorable opportunity to do it. The question is have they moved quickly enough, early enough to allow all of those things to kind of kick in in time to stop any kind of further deterioration in the labor market?

Ylan Mui:

Do you know? I got an email on the day that the Fed announced its rate cut from the mortgage broker Neil that we use when we are buying our first places, saying, in case you missed it, the Fed has cut rates. Now's a great time to look at refinancing your mortgage or taking out a new one, and I thought, wow, this guy's really on it.

Neil Irwin:

Yeah, that's an industry that's, you know they've last two years. There's been no refi activity, because why would you ever refi? And you know anybody with a half decent house has just held onto it and enjoyed their 2% 3% mortgage and the degree that people are starting to get feeling a little cramped and want to upgrade and now the rate's 6% instead of 8%, maybe you start to see some more fluidity in that market. It might grease the wheels a little bit of housing, yeah.

Bryan DeAngelis:

Neil to that point. I hope you don't mind, I do want to pivot a little bit towards the election. We're getting close. How much does this start to sink in for the average consumer, the average voter, where we're recording this, at a time where Biden's doing a victory lap right now on this rate cut? Is it enough that it'll start to be felt through the economy, where people might feel a little bit better about Harris going into the polls?

Neil Irwin:

I think at the margin certainly I've become a believer. There's been this question that I've been writing these stories, as have all the other economics writers, for the last three years. Look, the job market looks good, people are seeing raises, relations may be high, but not that high. Why are people so miserable about the economy? Why are all the sentiment and the confidence indicators down in the dumps? And there's an interesting paper, working paper, that came out a couple months ago saying it's easy to explain, if you think of interest rates as another price, as another cost, interest rates don't really flow into the consumer price index or the inflation numbers that we normally use. But if you think about it a little differently that if you're trying to buy a house, you're trying to buy a car, a higher interest rate does make it more expensive that high interest rates do help explain that sentiment mystery, that maybe isn't such a mystery.

Neil Irwin:

If you believe that story and I do then some relief on rates should help with people's sentiment and confidence. Is it enough? Is it early enough? How long does that take to play out? They did 525 basis points of hikes, starting in 22, and now they've done 50 basis points of cuts. How does that all net out. I don't know, but I think directionally. I think it's a positive if you're the incumbent.

Bryan DeAngelis:

And I have to ask I mean, I know Powell's answer and I know he doesn't think about politics, but he has eyes and ears Do you think they waited this long to try to stay, you know, as far away? Well, the impact to be as far away from the election, as opposed to two cuts kind of leading up to conventions and everything else, or is he truly got blinders on for this?

Neil Irwin:

I mean I think, as Powell keeps saying every time he's asked this question, yeah, it's hard enough to try and make the right decision for the economy given all the myriad issues going on, and to try and include some aspect of political timing would just be impossible. You can't really do it, you know. You ask the question, okay. So even if he was trying to get one candidate elected or favor one party, what would he do differently? It's not even obvious what that answer would be right. Do you start rate cuts earlier so people get more benefit, or do you wait till right before the election so you get more of a headline effect? Do you front load? Do you back load? Ultimately, they just have to make what they think is the right decision. And I think there's a decent case. They should have cut in July and again it was kind of a mulligan by doing 50 basis points here To argue they should have waited until November just for the sake of getting after the election.

Neil Irwin:

It's hard to justify that and I will say on the optics, there are two governors on the seven-member Fed Board of Governors appointed by Trump currently. One of them did dissent, so Mickey Bowman, a community banking-focused governor. She dissented first won by a Fed governor since 2005. She wanted to only raise or only cut 25 basis points, not 50. But the other Trump appointee, chris Waller, did go along with this decision. I think that does help it look a little less political than it would otherwise. Yeah, that's a good point.

Ylan Mui:

Do you think that I mean at this point, for former President Trump called the Fed's rate cut, I think an unusual number, referring to the 50 basis points versus 25? I mean, I don't know that there's anything that Jay Powell can do at this point to keep his seat if Trump does get reelected.

Neil Irwin:

Oh, I don't, that's true, like I see very little reason to think Jay Powell would ever get another term, because if you're Trump, you've made your views of Powell very well known. Even if you're Kamala Harris, you know Powell, you want a Democrat in that job and it was, you know, kind of a borderline decision whether it was going to be Jay Powell or Lael Brainard, appointed by Biden this time three years ago, went with the incumbent, went with Powell. You know, if Kamala Harris wins, she's going to want, if it's not, either Brainard or another Democrat in that job and Powell's, I think he's 72, 71. He has young grandkids, he's a wealthy man, he might want to enjoy his retirement. So I don't think he's going to be angling for that job and even if he did, I don't think he's going to get it for another term.

Ylan Mui:

He's got Grateful Dead concerts to go to, he can easily fill his days. He's not Fed chair, right.

Neil Irwin:

Yeah, and he did an economic club event with David Rubenstein a couple months ago and you know he was asked. David always asks kind of unusual questions about about life and David's, do you like going to restaurants? And and J-PAL saying I don't really go to restaurants anymore, it's, you know, it's, it's, I'd rather just have you know people come up to you and want to talk to you. It's. I don't think he likes the fame aspects of this job. Reading between the lines.

Bryan DeAngelis:

Not not to get ahead of anything Jay Powell is going to do, but we were at the Pissarro Center's Financial Markets Conference this week and I was surprised to hear McHenry say that Powell might go down as one of the greatest Fed chairs, especially if the soft landing in the next few months work out the way he's planned. I'm curious. I know you're a journalist, but if that's more of a consensus you're hearing from folks or even if you want to share your own opinion.

Neil Irwin:

I think it's absolutely plausible, but I think a lot depends on this next year or two.

Neil Irwin:

He's in office until May of 2026. So he's in office for really the better part of another two years and a year and a half, let's call it, and there's a lot that can happen in that next year and a half. And I've been thinking about Alan Greenspan a lot lately. As we saw with him, if a giant crisis happens right after you leave office and you're a Fed chair, it does not help your historical legacy and reputation. So it's not only that we don't know what's going to happen over the next 18 months or so while he's still in office, it's that there's time to tell on how much his legacy of really being the most aggressive full employment Fed chair we've had, going back to what they did in both the pre-pandemic era and then during the pandemic really trying to do everything that he could to encourage a labor market recovery that made them a little late on inflation. That's going to be the knock on his legacy, but if they can stick this landing and we avoid a recession, that certainly reflects well on him.

Bryan DeAngelis:

Let me ask you one final question. Just. I would love to almost pick your brain, like looking towards the future, any economic trends that you're thinking about. You know we're doing a lot here, obviously around AI, and I continue to think how will AI, you know, impact how we think about jobs numbers and even how we connect that to the economy going forward? But what are you looking out at a couple of years?

Neil Irwin:

Yeah, that's certainly one of the megatrends. I mean, the question I've been asking for months, a couple of years even, is how much of the productivity surge we've seen over the last 18 months or so is real, Is it durable, Is AI part of it, or will AI be part of it in the future? You know we had this period called secular stagnation, call it whatever you want. The 2010s were this period where low growth, low inflation, low productivity growth, you know elevated unemployment and you know we're now in a different world. We seem to have higher structural interest rates, possibly higher structural inflation. We have these very large deficits that are creating an upward tug on rates, and higher productivity would be one way out of this dilemma and it would really help all the numbers if we can achieve it. So, yeah, and AI would certainly be part of that.

Neil Irwin:

You know, I do think, related to what I just said, the public debt is an issue in a way that the political debate does not really capture, and the next president will be constrained by deficits and debts in ways that they just have had free lunches for the last 15 years. And you know, maybe that is not evident today, but at some point it will be, and the old Herbert Stein line is something can't go on forever it won't. And running deficits this much, this large share of GDP, about 6% of GDP, much larger than trend growth indefinitely, is going to come to a head eventually, whether it's in this next presidential administration or the one after that.

Bryan DeAngelis:

Yeah, unfortunately I'm not sure we have the time to unpack that. It was striking to me a few months ago when Paul did his 60 Minutes interview and how careful they are with what they talk about. But he was very kind of pointed on raising the alarms about the debt and deficit and what he's thinking about there. So well, that's great. We'll have to have you back on to dig into that one. But, neil, thanks so much for joining Alon and I today and helping break down this supersized cut, as I think you called it in your newsletter. We really appreciate it. Thanks, guys. Cut, as I think you called it in your newsletter. We really appreciate it. Thanks, guys. And to all our listeners, remember to like and subscribe wherever you listen to your podcasts. You can follow us on X at PentaGRP, or on LinkedIn at PentaGroup. I'm your host, brian, here with Elan and, as always, thanks for listening to what's at Stake.