Today is “Fed Day” – when the Fed announces whether or not it will cut rates.
And – given that PPI (Producer Price Inflation) came in hotter than expected today, the Fed will very likely not cut.
PPI is from February too, BEFORE the Iran war and the run-up in oil prices, so we can expect an inflation-leery Fed to be very concerned.
Should the Fed Cut Rates to Offset the Impact of High Oil Prices?
There was a lot of banter on X about the need for a rate cut to offset the impact of high oil prices (currently at $97 per barrel, up from $65 before the war, driving inflation fears). There was also banter about raising rates to offset oil-price-inflation.
Here are a few quick takes from some prominent analysts.
Economist Steve Hanke:
Higher oil prices will increase the cost of goods, but that is not “inflation” per se. Actual inflation is caused by putting too much money in circulation, and high oil prices have nothing to do with an increase in the money supply (which is caused primarily by bank lending). So, cutting rates will do very little to offset high oil prices in the short term.
More importantly, raising rates to offset price increases driven by higher oil prices will do very little, other than further weaken an already damaged economy.
Analyst Jim Bianco:
Mr. Bianco is renowned as a very astute analyst who was correct with all of his inflation calls over the last 5 years. He says cuts to the short-term Fed Funds Rate will result in higher rates – just like we saw in the fall of 2024, when the Fed cut the Fed Funds Rate by 1%, and mortgage rates went UP by 1% in response.
Analyst Ed Dowd:
Mr. Dowd thinks the Fed should cut for sure, as we face DEFLATIONARY pressures from many things, including: (1) the potential popping of the AI bubble; (2) the impact of tariffs; (3) the sudden shutoff of immigration spending; (4) burgeoning credit crises in private credit and real estate; and (5) a very weak labor market.
While Mr. Dowd makes a very strong case (see his X posts), I suspect the Fed will do nothing, as Fed members and many bond investors remain aligned with Mr. Bianco and his inflation concerns.
What Will Bring Down Rates?
The end of the Iran war and/or the opening of the Strait of Hormuz. When that happens, oil prices will plummet, and so will rates, as we’ve now seen how sensitive rates are to oil prices.
