According to the president of the Federal Reserve of Minneapolis, Neel Kashkari, the US central bank may be forced to wait until 2025 to start lowering interest rates.
It is reported by Bloomberg citing an interview given by Kashkari on Fox News Channel.
Such a scenario could also have a negative impact on the crypto markets.
Summary
The issue of interest rate cuts by the Federal Reserve
Kashkari’s reasoning starts from the resilience of the US real estate market.
With a real estate market that shows no signs of slowing down, despite interest rates still very high, there is a concrete risk that inflation will not continue to decrease towards 2%.
Using the annual core inflation rate of the USA as a reference, if from April of last year until February 2024 it had dropped from 5.5% to 3.8%, in March instead the downward trend seems to have stopped.
In other words, in recent months there seem to be factors that are working against this decline, so much so that they even have the strength to stop the downward trend that has been going on almost continuously since October 2022, if not perhaps even to reverse it.
One of these factors is precisely the resilience of the US real estate market, on which prices continue to rise despite everything.
According to Kashkari, the Fed may seriously consider the possibility of starting to cut interest rates only when it is clear, certain, and evident that inflation will be decreasing.
At that point it is possible that the crypto markets may not be positively influenced in the second half of 2024 by this type of decisions, although nothing excludes that they could be influenced by other decisions or other events.
Federal Reserve: Forecasts on future interest rate cuts
The president of the Federal Reserve of Minneapolis argues that in order to have good certainty that it is possible to start cutting rates thanks to a decreasing inflation, it may be necessary to wait until 2025.
However, not everyone agrees with this hypothesis.
For example, financial markets at this moment seem to be convinced that the Fed could start cutting them already at the end of September, or at the latest at the beginning of November.
However, it should be remembered that these long-term forecasts of financial markets in recent years have been much more optimistic than the reality of the facts, so much so that by the end of 2023 they were already predicting the beginning of interest rate cuts as early as March 2024.
Now, instead, they not only had to change their minds forcibly, since in March the Fed did not cut them, but they even stopped believing that cuts could start coming as early as May, or June, or July.
However, there is the possibility that the truth lies in the middle.
The election campaign
The electoral campaign for the November presidential elections is already underway in the USA.
The elections will take place before the data on October inflation is published, so the impact of a possible interest rate cut in September will not have time to reveal its results before people go to vote.
During the current election campaign, the democratic government of Joe Biden, who is running for re-election, is trying to support the US economy as much as possible with a high public deficit.
On one hand, this public deficit seems to be actually helping the US economy, but on the other hand it inevitably also stimulates inflation.
Since core inflation is at 3.8%, and apparently not increasing, Biden must have thought that such a strategy could bring him more electoral advantages than disadvantages.
Sure, in the event that inflation in the coming months were to rise well above 4%, then some electoral disadvantage could be experienced, but the reaction of inflation to government stimuli appears to be relatively slow.
In such a scenario, it is possible that the Fed is trying to send more or less explicit messages to the government that the current strategy is the basis of the new possible flare-up of inflation.
These are probably real warnings, since Biden would benefit from a rate cut before November, always for electoral reasons.
The role of the Fed
The task of the Fed, however, is not to satisfy the electoral needs of the government, but to try to bring inflation back to 2%.
So Kashkari’s reasoning is not only perfectly legitimate, but also absolutely logical.
In other words, the Fed could not cut interest rates just because it could benefit one of the candidates, and indeed should not cut them if inflation does not return to decrease.
Moreover, the current president of the Fed, Jerome Powell, was chosen by Donald Trump, who will be the main challenger of Joe Biden in the presidential elections in November.
At this point, it does indeed seem likely that the Fed may decide not to cut interest rates until there are clear signs that inflation will return to fall towards 2%, although things could change after the presidential elections on November 5th.
The Fed will have to make a decision on November 7, after the elections, and at that point it may no longer have any political obstacles in deciding how to proceed.
Markets actually believe that the decision on September 18th could already go in that direction, since it will not have time to produce consequences that could affect the elections on November 5th, but if the central bank feels somehow involved for electoral purposes, it could decide to raise a wall and refuse to follow the indications of politics.
