Two years after aggressively raising interest rates, the Federal Reserve is in a delicate balancing act as it aims to steer inflation back to its long-term 2 per cent goal. Getting it wrong will have spillover effects in the US and around the globe.
With rates likely at their peak target range and Personal Consumption Expenditure (PCE) Price Index showing inflation battened down to 2.4 per cent, the Fed is setting the stage for the next phase in its fight: cutting interest rates.
Fed officials have cautioned against declaring victory too soon even as a soft landing appears in sight.
And although the central bank still projects it will cut rates three times this year, it suggested recent bumpy inflation data warrants a careful approach moving forward.
“I don't think we really know whether this is a bump on the road or something more. We'll have to find out,” the Fed's chairman Jerome Powell told reporters last week.
“In the meantime, the economy strong, the labour market is strong, inflation has come way down, and that gives us the ability to approach this question carefully.”
That uncertainty is central to the Fed's coming decisions on interest rates.
“Part of the problem here is that they won't know that they've overdone it until it's too late because they'll only know it when the economy slows down and unemployment starts to rise. So the maths is a bit of a lag,” said Joseph Gagnon, senior fellow at the Peterson Institute for International Economics and a former senior economist at the Federal Reserve Board.
“By the time they realise that they have overdone it, they're going to be in a rush to cut rates and they may be too late.”
And their moves will be closely watched by other central banks in Europe, the UK and the Gulf, which are also preparing for rate cuts. The Bank of England and European Central Bank could begin dialling back as soon as June, which is when markets expect the Fed will issue its first rate cut.
“People seem to take a cue from the US, and when US interest rates rise other countries' rates rise, and we can debate about why that is, but it seems to be true,” Mr Gagnon said.
“That will be bad news for other countries in the sense that they'll see higher rates. It'll push the dollar up or push their currencies down, which maybe they don't want because that's bad for their inflation.
“It sort of desyncs the whole world.”
Going too early, however, runs the risk of seeing inflation reaccelerate. This would likely force the Fed to raise interest rates once more.
Again, this would affect the entire world, with other central banks forced to react to the Fed's decisions.
“When the Fed tightens, lending tends to flow to the US. And when money flows to the US, other central banks are forced to either raise interest rates or let their currencies depreciate,” said John Leahy, a professor at the Ford School and the Department of Economics at University of Michigan and former Fed visiting scholar.
Peter Andersen, founder of Andersen Capital Management, does not believe the Fed is in a position where it needs to cut interest rates this year.
“I consider the current rates as the most normal rate I have seen in many years, and also symbolic of a normally functioning economy, not an economy that's on crutches with low rates, not an economy that's crushed with super high rates, but if anything, slightly low to average,” said Mr Andersen.
While he commended the Fed for its progress against inflation with so much “soft data”, Mr Andersen argued dialling back this year would undo all the work the Fed has done after bringing the economy to a margin of safety.
“The margin of safety will shrink tremendously,” he said.
Still, the Fed remains in a delicate position, because as inflation has been steadily climbing down, the US unemployment rate has slowly been creeping up to its current level of 3.9 per cent.
Higher interest rates are meant to cool the economy in times of high inflation, but it also runs the risk of slowing the economy too much, which can eventually result in a recession or greater levels of unemployment.
“If the Fed doesn't loosen, and the economy goes into recession, that's a completely different situation,” Mr Leahy said.
“If the US economy goes into recession, the spillovers are basically that when the US economy goes into recession, generally Europe goes into recession. The world doesn't do well.”
He also believes the current Fed is distinct from previous administrations for taking more consideration of unemployment into its policy decisions.
“I think what this Fed is trying to do is trying to balance much more inflation and unemployment. And if there's any argument for cutting rates, it is that the you want to get ahead of a potential rise and unemployment coming later,” Mr Leahy said.
Adding to this uncertainty and difficulty is the novelty of this inflationary period. Unlike in previous cycles, much of the inflationary pressures were caused by supply-chain issues related to the Covid-19 pandemic.
Also surprising is the resilience of the economy in the face of the Fed's interest rates. Instead of falling into a recession, the US economy grew at a 3.2 per cent annualised pace last year.
“The difficulty the Fed is facing is that it's been hit with this series of fairly unique events. And it's managed remarkably well,” Mr Leahy said.
“The fact that we're even having this conversation is probably a good thing for them.”
The 100 Best Novels in Translation
Boyd Tonkin, Galileo Press
MATCH INFO
Pakistan 106-8 (20 ovs)
Iftikhar 45, Richardson 3-18
Australia 109-0 (11.5 ovs)
Warner 48 no, Finch 52 no
Australia win series 2-0
Tearful appearance
Chancellor Rachel Reeves set markets on edge as she appeared visibly distraught in parliament on Wednesday.
Legislative setbacks for the government have blown a new hole in the budgetary calculations at a time when the deficit is stubbornly large and the economy is struggling to grow.
She appeared with Keir Starmer on Thursday and the pair embraced, but he had failed to give her his backing as she cried a day earlier.
A spokesman said her upset demeanour was due to a personal matter.
The specs
- Engine: 3.9-litre twin-turbo V8
- Power: 640hp
- Torque: 760nm
- On sale: 2026
- Price: Not announced yet
Volvo ES90 Specs
Engine: Electric single motor (96kW), twin motor (106kW) and twin motor performance (106kW)
Power: 333hp, 449hp, 680hp
Torque: 480Nm, 670Nm, 870Nm
On sale: Later in 2025 or early 2026, depending on region
Price: Exact regional pricing TBA
Killing of Qassem Suleimani
David Haye record
Total fights: 32
Wins: 28
Wins by KO: 26
Losses: 4
F1 The Movie
Starring: Brad Pitt, Damson Idris, Kerry Condon, Javier Bardem
Director: Joseph Kosinski
Rating: 4/5
RESULT
Kolkata Knight Riders 169-7 (20 ovs)
Rajasthan Royals 144-4 (20 ovs)
Kolkata win by 25 runs
Next match
Sunrisers Hyderabad v Kolkata Knight Riders, Friday, 5.30pm
The five stages of early child’s play
From Dubai-based clinical psychologist Daniella Salazar:
1. Solitary Play: This is where Infants and toddlers start to play on their own without seeming to notice the people around them. This is the beginning of play.
2. Onlooker play: This occurs where the toddler enjoys watching other people play. There doesn’t necessarily need to be any effort to begin play. They are learning how to imitate behaviours from others. This type of play may also appear in children who are more shy and introverted.
3. Parallel Play: This generally starts when children begin playing side-by-side without any interaction. Even though they aren’t physically interacting they are paying attention to each other. This is the beginning of the desire to be with other children.
4. Associative Play: At around age four or five, children become more interested in each other than in toys and begin to interact more. In this stage children start asking questions and talking about the different activities they are engaging in. They realise they have similar goals in play such as building a tower or playing with cars.
5. Social Play: In this stage children are starting to socialise more. They begin to share ideas and follow certain rules in a game. They slowly learn the definition of teamwork. They get to engage in basic social skills and interests begin to lead social interactions.
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KEY DEVELOPMENTS IN MARITIME DISPUTE
2000: Israel withdraws from Lebanon after nearly 30 years without an officially demarcated border. The UN establishes the Blue Line to act as the frontier.
2007: Lebanon and Cyprus define their respective exclusive economic zones to facilitate oil and gas exploration. Israel uses this to define its EEZ with Cyprus
2011: Lebanon disputes Israeli-proposed line and submits documents to UN showing different EEZ. Cyprus offers to mediate without much progress.
2018: Lebanon signs first offshore oil and gas licencing deal with consortium of France’s Total, Italy’s Eni and Russia’s Novatek.
2018-2019: US seeks to mediate between Israel and Lebanon to prevent clashes over oil and gas resources.
COMPANY%20PROFILE
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ICC Awards for 2021
MEN
Cricketer of the Year – Shaheen Afridi (Pakistan)
T20 Cricketer of the Year – Mohammad Rizwan (Pakistan)
ODI Cricketer of the Year – Babar Azam (Pakistan)
Test Cricketer of the Year – Joe Root (England)
WOMEN
Cricketer of the Year – Smriti Mandhana (India)
ODI Cricketer of the Year – Lizelle Lee (South Africa)
T20 Cricketer of the Year – Tammy Beaumont (England)
'O'
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Killing of Qassem Suleimani
Boulder shooting victims
• Denny Strong, 20
• Neven Stanisic, 23
• Rikki Olds, 25
• Tralona Bartkowiak, 49
• Suzanne Fountain, 59
• Teri Leiker, 51
• Eric Talley, 51
• Kevin Mahoney, 61
• Lynn Murray, 62
• Jody Waters, 65
UAE currency: the story behind the money in your pockets
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Student Of The Year 2
Director: Punit Malhotra
Stars: Tiger Shroff, Tara Sutaria, Ananya Pandey, Aditya Seal
1.5 stars
Sole survivors
- Cecelia Crocker was on board Northwest Airlines Flight 255 in 1987 when it crashed in Detroit, killing 154 people, including her parents and brother. The plane had hit a light pole on take off
- George Lamson Jr, from Minnesota, was on a Galaxy Airlines flight that crashed in Reno in 1985, killing 68 people. His entire seat was launched out of the plane
- Bahia Bakari, then 12, survived when a Yemenia Airways flight crashed near the Comoros in 2009, killing 152. She was found clinging to wreckage after floating in the ocean for 13 hours.
- Jim Polehinke was the co-pilot and sole survivor of a 2006 Comair flight that crashed in Lexington, Kentucky, killing 49.
Company%20profile
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The%20National%20selections
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Our legal columnist
Name: Yousef Al Bahar
Advocate at Al Bahar & Associate Advocates and Legal Consultants, established in 1994
Education: Mr Al Bahar was born in 1979 and graduated in 2008 from the Judicial Institute. He took after his father, who was one of the first Emirati lawyers
IF YOU GO
The flights: FlyDubai offers direct flights to Catania Airport from Dubai International Terminal 2 daily with return fares starting from Dh1,895.
The details: Access to the 2,900-metre elevation point at Mount Etna by cable car and 4x4 transport vehicle cost around €57.50 (Dh248) per adult. Entry into Teatro Greco costs €10 (Dh43). For more go to www.visitsicily.info
Where to stay: Hilton Giardini Naxos offers beachfront access and accessible to Taormina and Mount Etna. Rooms start from around €130 (Dh561) per night, including taxes.
UAE currency: the story behind the money in your pockets
