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The Fed is likely cutting rates again Thursday. Everything you need to know

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Federal Reserve Board Chairman Jerome Powell holds a press conference following a two-day meeting of the Federal Open Market Committee on interest rate policy in Washington, U.S., September 18, 2024. REUTERS/Tom Brenner

Tom Brenner | Reuters

The Federal Reserve likely will stick to the business at hand when it wraps up its meeting Thursday with another interest rate cut, but will have its eye on the future against a backdrop that suddenly has gotten a lot more complicated.

Financial markets are pricing in a near-certainty that the central bank’s Federal Open Market Committee will lower its benchmark borrowing cost by a quarter percentage point as it seeks to “recalibrate” policy for an economy that is seeing the inflation rate moderate and the labor market soften.

The focus, though, will turn to what’s ahead for Chair Jerome Powell and his Fed colleagues as they navigate a shifting economy — and the political earthquake of Donald Trump’s stunning victory in the presidential race.

“We think Powell will refuse to give any early judgment on the implications of the election for the economy and rates, and will seek to be a source of stability and calm,” Krishna Guha, head of global policy and central bank strategy at Evercore ISI, said in a a note issued before the election’s outcome was known.

In keeping with policymakers’ historical desire to stay above the political fray, Powell “will say the Fed will take the time it needs to study the new administration’s plans” then will “refine this assessment as actual policies are developed and enacted,” Guha added.

So while the immediate action will be to stay the course and enact the cut, which equals 25 basis points, the market’s attention likely will turn to what the committee and Powell have to say about the future. The fed funds rate, which sets what banks charge each other for overnight lending but often influences consumer debt as well, is currently targeted in a range between 4.75%-5.0%.

Market pricing currently favors another quarter-point cut in December, followed by a January pause then multiple reductions through 2025.

Preparing for Trump

But if Trump’s agenda — tax cuts, higher spending and aggressive tariffs — comes to fruition, it could have a meaningful impact on a Fed trying to right-size policy after the mammoth rate hikes aimed at controlling inflation. Many economists believe another round of isolationist economic moves from the president-elect could reignite inflation, which held below 3% during Trump’s entire first-term despite a similar recipe.

Trump was a frequent critic of Powell and the Fed during his term, which ran from 2017-21, and is in favor of low interest rates.

“Everyone is on the lookout for future rate cuts and whether anything is telegraphed,” said Quincy Krosby, chief global strategist at LPL Financial. “Also, however, there’s the question of whether or not they can declare victory on inflation.”

Any answers to those questions would be largely left to Powell’s post-meeting news conference.

Though the committee will release its joint decision on rates, it will not provide an update on its Summary of Economic Projections, a document issued quarterly that includes consensus updates on inflation, GDP growth and unemployment, as well as the anonymous “dot plot” of individual officials’ interest rate expectations.

Beyond the January pause, there’s considerable market uncertainty about where the Fed is heading. The SEP will be updated next in December.

“What we’re going to hear more and more of is the terminal rate,” Krosby said. “That’s going to come back into the lexicon if yields continue to climb higher, and it’s not completely associated with growth.”

So where’s the end?

Traders in the fed funds futures market are betting on an aggressive pace of cuts that by the close of 2025 would take the benchmark rate to a target range of 3.75%-4.0%, or a full percentage point below the current level following September’s half percentage point cut. The Secured Overnight Financing Rate for banks is a bit more cautious, indicating a short-term rate around 4.2% at the end of next year.

“A key question here is, what’s the end point of this rate cut cycle?” said Bill English, the Fed’s former head of monetary affairs and now a finance professor at the Yale School of Management. “Fairly soon, they’ve got to think about, where do we think this rate cut period changes with the economy looking pretty strong. They may want to take a pause fairly soon and see how things develop.”

Powell also may be called on to address the Fed’s current moves to reduce the bond holdings on its balance sheet.

Since commencing the effort in June 2022, the Fed has shaved nearly $2 trillion off its holdings in Treasurys and mortgage-backed securities. Fed officials have said that the balance sheet reduction can continue even while they cut rates, though Wall Street expectations are for the run-off to end as soon as early 2025.

“They’ve been happy to just kind of leave that percolating in the background and they probably continue to do that,” English said. “But there’s going to be a lot of interest over the next few meetings. At what point do they make a further adjustment to the pace of runoffs?”

Economics

Donald Trump revives ideas of a Star Wars-like missile shield 

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IN THE LATE 1980s Edward Teller, the father of the hydrogen bomb, and Lowell Wood, an astrophysicist, proposed a seemingly bizarre scheme to defend America against missile attack. The “Brilliant Pebbles” system envisaged thousands of small satellites in low-Earth orbit, each housing heat-seeking missiles to take out incoming Soviet nukes long before they released their warheads. The idea faded, not least because the technology seemed distant. Now Donald Trump is resuscitating it.

On the campaign trail Mr Trump promised to build an “Iron Dome” for America, referring to an Israeli missile-defence system. The name is a misnomer. The Israeli system is designed to take out short-range rockets. What Mr Trump meant, and spelt out in an executive order published on January 27th, was a more ambitious effort to detect and counter intercontinental ballistic missiles (ICBMs) and the like. America already has a system designed to do that, known as Ground-Based Midcourse Defence (GMD), which relies on interceptors in Alaska and California.

Mr Trump’s proposal differs in important respects. One is its scope. GMD was intended to parry limited attacks involving a small number of ballistic missiles, such as might occur in an attack by North Korea. Mr Trump’s shield is supposed to block “any foreign aerial attack”, which would imply not only both cruise and ballistic missiles, but also a full-scale strategic attack by Russia or China involving many hundreds of missiles at once.

Critics of missile defence say this is folly, because it is generally cheaper to build additional offensive systems than interceptors to stop them. Russia and China—which are building missile shields of their own—have also argued that American defences risk undermining nuclear deterrence, because they might one day allow America to strike enemies without fearing retaliation. Advocates retort that the missile threat has changed: long-range non-nuclear missiles could now paralyse military facilities in the continental United States, allowing enemies to coerce America into staying out of a distant war.

In any case, Mr Trump’s favoured design is also noteworthy. GMD targets incoming missiles when they are in mid-flight. In theory it is easier to take out a missile in its “boost phase” (as it is taking off), when it is moving more slowly. The problem is that this is a fleeting moment—three to five minutes for ICBMs.  The new order calls for “proliferated space-based interceptors capable of boost-phase intercept”. That amounts to a Brilliant Pebbles-like system: a lot of small, armed satellites, some of which would be above Russia, China and other foes at all times.

The cost of building tiny computers and putting thousands of them into orbit is far lower than it was in Mr Teller’s days—partly thanks to Elon Musk. But it is still eye-wateringly expensive, and liable to hoover up a good chunk of the defence budget. America would require 500 satellites in total to have just three to four interceptors in range of North Korean launchpads, estimates Bleddyn Bowen of Durham University; hundreds more than that would probably be needed, he says.

A key technical challenge will be building space sensors with “fire-control-quality tracking”—good enough at spotting and tracking enemy missiles to guide interceptors to them—says Tom Karako of CSIS, a think-tank. But if the technology proves mature, the implications could go beyond missile defence. “We will see the emergence, gradual understanding, and eventually acceptance of ‘space fires’,” says Mr Karako, which could include satellites capable of targeting, with both explosive and electronic means, targets on the ground, those in the air and other satellites in orbit.

There are many doubters. Mr Trump aired similar ideas in his first term but failed to back them with hard cash. Spending for an American Iron Dome will compete with a string of other priorities, from a bigger navy to more nuclear weapons. “It’s always a budget question,” says Mr Karako. “Show me your budget for missile defence, and I’ll tell you what your ‘Iron Dome for America’ is.”

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Economics

An alternative theory to explain America’s murder spike in 2020

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You might call it a new golden age. America’s economy is strong, overdose deaths are falling and crime rates are down. For the second consecutive year murders in America have plummeted. The surge in violence in 2020, which was the deadliest year in over two decades, may now seem like a distant memory to some. Yet for criminologists and policymakers the question of what caused that spike in the first place remains unanswered.

A popular theory, advanced prominently by Heather Mac Donald of the Manhattan Institute, a think-tank, is that it was caused by a “George Floyd effect”. The theory is as follows: after the murder of Floyd by police officers in Minneapolis in 2020, police lost trust in high-crime communities and among African-Americans, leading to lower clearance rates for murders. When people think they will not get caught, they commit more crime. Another version of the Floyd effect thesis holds that police officers, beset by rising public hostility, deliberately pulled back from high-crime neighbourhoods, for fear of being prosecuted for doing their jobs. Either way, protests against police brutality lead directly to more murders, a bitter unintended consequence for the protesters and, perhaps, evidence of the kind of soft liberalism from big-city Democrats that Donald Trump was elected to expunge.

A recent report from the Brookings Institution, a think-tank, advances an alternative theory. Rohit Acharya and Rhett Morris, the report’s authors, argue that the rise in murders began in April 2020, about six weeks before the murder of Mr Floyd. They contend that high unemployment and school closures in poor neighbourhoods, both brought about by covid-19 and the policy response to it, left teenage boys idle. This, not the Floyd effect, was responsible for the murder spike. This would suggest an awful trade-off: those early lockdowns saved many lives, but they also may have resulted in more murders.

Chart: The Economist

Using weekly national homicide data, Messrs Acharya and Morris show that throughout the summer of 2020 murders rose 30% compared with the summer of 2019. Crucially, they do not find an inflection point around the end of May, when Mr Floyd was killed. Across the six weeks preceding his death national weekly murders increased by around 17 murders per week, a rate 70% greater than the same period in 2019. And during the six weeks following his death, murders rose at a similar rate.

What, then, caused this increase? The authors theorise that the economic circumstances of the pandemic are to blame. Criminologists concur that, in general, poverty correlates with crime rates. In Atlanta, 65% of all homicides occur in neighbourhoods where at least 30% of the population lives below the poverty line. Nearly every big American city displays this trend. Poorer neighbourhoods were also disproportionately affected by the pandemic: job losses and high-school dropout rates were far higher. Cities with a greater share of young men living in these conditions saw larger increases in homicides in 2020.

Juveniles typically commit few murders. Though roughly half of murders go unsolved and not all jurisdictions report the age of the murderer, the available data suggest that fewer than 10% of homicides are committed by those under the age of 18. Yet between 2019 and 2020 juveniles accounted for an estimated 15-20% of the overall surge. That seems consistent with the idea that closed schools and idle teenage boys are a big part of the story.

Criminologists tend to be wary of single explanations. “It’s very difficult to come up with a definitive conclusion about what happened in 2020, because so many things changed at the same time”, says Aaron Chalfin, a criminologist at the University of Pennsylvania who was not involved with the Brookings report. He notes that, in the past, unemployment rates have not correlated with murder rates, although that does not necessarily mean no such relationship arose during the pandemic. And teasing out the interactions between variables is trickier still. Were school closures in poorer neighbourhoods responsible for juveniles committing more murders, or was it school closures plus fewer police officers patrolling the streets?

The research, says Neil Gross, a professor of criminology at Colby College (who was also not involved in the study), suggests that the nature of social ties in poor areas matters. Crime is often lower where “people know their neighbours and can look out on the street for errant teenagers and contact their parents”, says Mr Gross. That suggests yet another potential suspect: such neighbourhood watchers were locked down at home. 

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Economics

Donald Trump’s Defining Decade

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Donald Trump invoked the 1890s in laying out the agenda for his second term. But from his demand for the Panama Canal to his declaration of a national energy emergency to his order releasing the records of the assassination of John F. Kennedy to the music he grooved to at his inaugural balls, Mr Trump, in his first days back in office, has instead evoked a different decade: the 1970s, formative years for him, and for America.

It was in 1971 that Mr Trump, then in his mid-20s, moved from Queens into Manhattan, taking a rent-stabilised studio apartment with a view of a water tank. He had ambitions to turn his father’s Brooklyn-based business building middle-class housing into something grander. By the decade’s end he would be a millionaire in his own right, married to a glamorous immigrant and a fixture at clubs like Studio 54, with growing celebrity for projects such as his eponymous tower rising on 5th Avenue.

As he exited the 1970s in his mid-30s, the apprentice years of adulthood behind him, Mr Trump, like many Americans, had reasons to be cynical about politics and business, to be fearful of inflation and oil scarcity and urban crime, to be drawn to conspiracy theories, to think America had lost the national self-assurance of his childhood in the 1950s. During what Tom Wolfe branded “The ‘Me’ Decade”, amid revelations of dirty deeds by sainted figures, as Americans more freely embraced and divorced each other, old ideas about duty and service came to seem like frauds. “Forget foundationless traditions, forget the ‘moral’ standards others may have tried to cram down your throat,” advised one bestseller in those years, “Looking out for Number One”.

“The 1970s were daunting and frightening because habits and institutions that had succeeded brilliantly for half a century suddenly sputtered,” David Frum writes in his history of the decade, “How We Got Here: The 70s”. “Never—not even during the Depression—had American pride and self-confidence plunged deeper.” The disillusion, fear and reaction of those years hardened into the worldview that has carried Mr Trump twice to the Oval Office.

At the start of the 1970s Mr Trump met Roy Cohn, the man who probably influenced him more than anyone besides his father, sharpening his reflex to fight all comers for every advantage, as he is doing now as president. A ferocious New York lawyer, Mr Cohn became Mr Trump’s mentor, “introducing him to the netherworld of sordid quid pro quos that Cohn ruled”, wrote Mr Trump’s dogged biographer, Wayne Barrett, in “Trump”. Over the course of the 1970s Mr Trump became the largest individual donor in New York state and local elections. “I can buy a US senator for $200,000,” he once told an associate back then.

Revelations spilling out of the Watergate investigations were teaching all Americans similar lessons, and implicating more than just President Richard Nixon. America’s great corporations for years had evaded the law with donations to politicians of both parties. Not only Nixon had secretly recorded meetings in the Oval Office. So had Lyndon Johnson and John Kennedy.

In 1976 Congress for the first time created a permanent committee to oversee the intelligence agencies, and it revealed shocking secrets about coups and assassinations by the CIA. Then came revelations about the FBI. Robert Kennedy himself had ordered wiretaps on Martin Luther King. As suspicions of skulduggery grew, Congress in 1976 ordered investigations into the assassinations of John Kennedy and King. Hollywood seized on the spectre of rot in America’s foundations for the plots of such movies as “Three Days of the Condor”, about CIA murders of Americans, “Chinatown” and the “Godfather” series. Mr Trump’s response in 2017 when an interviewer called Vladimir Putin a killer—“You think our country’s so innocent?”—was straight out of the 1970s.

Government was coming to seem not just corrupt but incompetent. New York City teetered at the edge of bankruptcy as officials struggled to stem rising theft and homicide. “Welcome to Fear City” read pamphlets bearing a death’s head that police officers in casual clothes handed out to tourists in 1975. During a citywide blackout in 1977, chaos swept the streets, resulting in hundreds of injuries to police officers and thousands of arrests for looting. One might well have called it American carnage.

Four years of the condor

Nationally, new laws in the 1960s led to a surge in immigration in the 1970s, and illegal immigration along with it. Backlash was building against new rights granted to non-citizens, as it was against policies meant to advance integration and equality such as affirmative action and busing. Mr Trump first hired Cohn to defend him against a Justice Department suit accusing the Trumps’ company of excluding black renters. Asked at a deposition in 1974 when the first black people moved into one of his projects, Mr Trump replied, “I don’t care and I don’t know.” He was insisting on the same sort of “colour-blindness” he declared in his inaugural address this month to now be government policy.

Mr Trump once lamented that during the 1970s America lost “the feeling of supremacy that this country had in the 1950s”. In the 1970s, ceding control of the Panama Canal divided conservatives. In a televised debate with Ronald Reagan, William Buckley, the founding editor of National Review, said turning the canal over would bring Americans “increased security and increased self-esteem”. Time has proved him correct as far as security goes. But to many on the right the treaty with Panama became an exhibit of the same weakness that led to failure in Vietnam and the Iranian hostage crisis. Mr Trump’s pledge to retake the canal is a direct assault on the 1970s, and it underscores a basic question about his second term: will he lead Americans to transcend that decade at last, or to wallow in it?

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