Why is the Fed not cutting rates & talking about hiking them this year?(3)

4.Outlook for the Next Steps"

Currently, the US economy faces both short-term and long-term challenges.

In the short term, inflation in energy, food, real estate, and the service industry continues to rise. The Federal Reserve certainly cannot cut interest rates now, and the earliest possibility would be in June. This year is also an election year in the United States. According to convention, with the election scheduled for early November, the Fed can only stay put in September and October, regardless of whether it's cutting or maintaining interest rates. Any changes in monetary policy during the two months before the election will be labeled as "politicizing monetary policy." As an independent institution authorized by the US Congress, the Fed will never be dragged into political turmoil. Therefore, the window for Fed rate cuts is likely in June and July, with a maximum of two cuts this year. Of course, August is traditionally a period of central bank holidays. The Fed can issue statements alongside other central banks at the Jackson Hole Symposium and continue verbal intervention in the market. One of my students is involved in real estate development in Southeast Asia. Recently, he asked me when the Fed would cut rates so they could start construction. At the moment, it seems they'll have to wait a while longer.

The long-term challenge facing the US economy is structural deficits and debt issues. In recent years, the federal fiscal deficit in the US has skyrocketed due to both Biden's substantial payouts to individuals and businesses and tax cuts in previous years. The only way to control the fiscal deficit and reduce debt is through "increasing revenue and reducing expenditure." That is, after the new president takes office next year, reducing payouts to individuals and subsidies to businesses, and increasing corporate and individual tax rates. The federal government in the US provides significant subsidies for food, housing, healthcare, and social security to low-income groups. Bills passed by the White House in recent years, such as the inflation reduction bill, the chip bill, and the infrastructure bill, all require substantial fiscal support. Regardless of which party comes into power in the US, it's difficult for Congress to pass laws to raise taxes and cut spending. The Fed's limited ability to address the unsustainability of fiscal policy may mean it can only continue to maintain high interest rates to ensure inflation returns to 2%.