Peak Fedspeak is finally here

Fourteen months. For so long financial commentators have been speculating about the day the Federal Reserve will finally start cutting interest rates again.

Release is finally set to arrive on September 18, 2024, when the Fed’s policy-making committee concludes its next meeting. At the peak, the federal funds rate is likely to drop from 5.5% to 5.25%, and civilization as we know it will be forever changed.

Is it possible to overanalyze the Fed? The Wall Street ecosystem clearly doesn’t think so. Big banks and forecasting firms have issued hundreds, possibly thousands, of reports over the past year trying to predict exactly what the Fed will do and when. Stocks rise and fall as the prospect of easier money seems closer or more distant. Every day, financial news anchors ask pundits when the Fed is likely to start cutting rates, by how much and for how long.

The answer is finally at hand. The Fed is almost certain to announce a quarter-point interest rate cut on Sept. 18, which will be the start of a gradual easing cycle that could end with short-term rates around 3 percent by 2026. The estimate rate hike won’t end after the first rate cut, but once the Fed moves from tightening to easing, the stakes for future moves won’t be nearly as high.

Read more: What the Fed rate decision means for bank accounts, CDs, loans and credit cards

The Fed’s rate cut has dominated the financial outlook because it captures everything going on in the economy better than any other measure. He also factored in the 2024 presidential election, because the Fed more than any other body will finally signal when inflation, the bane of Joe Biden’s presidency, will be over. With the Fed cutting as the last undecided voters make up their minds, it could provide a subtle tailwind for Vice President Kamala Harris, who replaced Biden at the top of the Democratic ticket in July.

For two years since the 2020 COVID epidemic, the Fed has held short-term rates at effectively 0%. This was an emergency drug that the Fed deemed necessary to bring the economy back to life during the pandemic shock. Among other things, the so-called “zero bound” brought mortgage rates to record lows, fueling a housing boom and putting free money in the pockets of millions of homeowners who refinanced at much lower rates.

However, easy money led to inflation, and in March 2022, with the inflation rate at a spectacular 8.5%, the Fed began raising rates rapidly. By July 2023, when the Fed adopted its final rate hike, short-term rates went from 0% to 5.5%.

The story continues

Send a ticket to Rick Newman, follow Xor sign up for his newsletter.

The next 14 months brought a frenzy of Fedspeak as investors tried to figure out if the Fed was really done hiking and when it would pivot to easing again. Fed Chairman Jerome Powell has reiterated over and over and over that the Fed is “addicted to data” and will cut when the numbers warrant it. He was mostly talking about inflation and labor market data.

The numbers have now lined up. The inflation rate peaked at 9% in June 2022 and gradually declined thereafter. It is now at 2.5%, close to the Fed’s 2% target. The only real inflation left is rent, which is still running at 5%, and anomalies like insurance, which is rising for reasons unrelated to the underlying economy.

Read more: Cell phones, furniture, used cars: prices are falling here as the slowdown in inflation continues

The Fed cares about jobs because part of its mission is to “maximize employment” and make sure tight monetary policy doesn’t cool the economy enough to cause a recession. Job growth is still doing well, but it has weakened due to the spike in growth in 2022 and 2023. The combination of falling inflation and weak job growth basically gives the Fed the green light to start tapering, finally.

The Fed itself contributes to the incessant discourse of Fedspeak, always bringing out top policy makers for speeches, interviews and other public events. An interrupted database of public remarks by Fed policymakers lists 116 appearances by Powell et al. in the first eight months of 2023. Assuming that pace continued through 2024, that would total nearly 300 sets of remarks from Fed officials from early 2023 for analysts and investors to sift through and spin.

It didn’t used to be like this. Legendary Fed Chairman Alan Greenspan, who led the central bank from 1986 to 2006, was famous for his Yoda-like obfuscations that left everyone guessing about the Fed’s intentions. His successor, Ben Bernanke, felt the Fed needed to be more transparent, especially amid the Fed’s dramatic and unprecedented efforts to stop the Great Recession of 2008 and 2009 from becoming another depression.

So we now have round-the-clock analysis from Fed directors and everyone else in the market trying to interpret what it means. This is probably a good thing, as it reduces the likelihood of surprises. Everyone with a brokerage account knows that the Fed will cut rates in mid-September because the Fed basically said so. On the downside, investors these days might put too much effort into analyzing every Fed statement so they can promote whatever the Fed is going to do.

All this transparency may be part of the reason consumer confidence has soared in recent weeks. Longer-term rates, including mortgages, are already falling in anticipation of looser monetary policy. Prospective home buyers may think they’re about to take a break. The driving force is lower inflation, which itself encourages consumers.

When President Joe Biden was still running for re-election, one of the biggest questions was whether inflation would improve enough for the Fed to start cutting rates before Election Day, which in theory would have given Biden such a boost necessary. After Biden dropped out in July, Vice President Kamala Harris became the potential beneficiary — or victim — of any course followed by inflation, including the Fed’s pivot.

Momentum now favors Harris. A quarter-point interest rate cut by itself won’t save anyone a ton of money, but a larger, longer-term drop in rates will. And if the Fed signals that inflation is over, maybe more voters will start to believe it. The ultimate victory might be a bunch of Fedspeak that no one feels the need to pay much attention to.

Rick Newman is a senior columnist for Yahoo Finance. Follow X at @rickjnewman.

Click here for political news related to business and monetary policy that will shape stock prices tomorrow.

Read the latest financial and business news from Yahoo Finance