Jay Powell seeks to reduce interest rates in September for these reasons.

What motivates Jay Powell behind reducing interest rates in September

The original story was featured in CNN Business' Before the Bell newsletter. Would you like to subscribe? You can do so here.

Federal Reserve officials have been downplaying the recent excitement in various public appearances, repeatedly voicing their concerns about the persistent high inflation rates. The question now is whether the central bank will lower interest rates this fall or not. This is a crucial issue with significant implications for the overall economy.

I recently spoke with Tom Porcelli, Chief US Economist at PGIM Fixed Income, about what could happen next and what it might mean for the economic landscape.

Here's an excerpt from our conversation, which has been edited for brevity and clarity.

Do you think markets responded appropriately to the recent cooling of inflation data?

It's intriguing that the equity market is cheering the prospect of the Fed cutting rates. If the market believes that Fed's decision to lower rates would prolong the current economic cycle, then I concur. But it's important to note that there's a thin line between cutting rates to extend the cycle and cutting them because the cycle is nearing its end (and the economy is deteriorating). All investors need to consider this in the upcoming months. According to our viewpoint, if you start cutting rates now, you could potentially extend the cycle.

Could you elaborate on the idea of extending the cycle?

When the Fed is reducing interest rates, it's doing so because a recession is imminent, right? In instances where the Fed cuts and a recession follows, that's usual. So, there's a fine distinction between cutting rates to prolong the cycle and cutting rates due to a recession. You're on a tightrope when it comes to this.

Can you discuss how the Fed has managed the challenging position it's been in, trying to prevent a recession while reducing rates?

Powell's shift back in July is worth revisiting. At that time, we had a core inflation rate of 4.2%, which was more than double the target rate. However, he decided that they did not need to raise rates any further. If you recall, the mention of the dovish pivot happening in December - it didn't. It actually happened in July.

Powell took a gamble then because he understood that being more aggressive with rate hikes could cause substantial damage to the labor market. He was emphasizing that they could not wait for inflation to reach 2% because that could result in more serious economic repercussions. He aimed to position himself as a hawk, but I believe Powell is more of a dove. Numerous actions he's taken since then support this perspective. I do empathize with his effort to achieve the elusive soft landing – something that hasn't been reached in decades. When it comes to inflation, he can't afford to lose sight of it, but he's also prioritizing the labor market.

Do you still expect the Fed to cut rates in September?

Absolutely, if our analysis is correct and Powell wants to cut rates, September is a possibility. If we see a series of improved inflation data between now and September, I'm convinced that September is a potential option.

How does the November election come into play?

Over the past ten election years, it's evident that the Fed modifies its policy during electoral years. Therefore, it's safe to assume that the Fed will adjust rates based on the prevailing economic conditions, even during an election year.

What would be the repercussions if the Fed does not cut rates?

The longer we observe no rate cuts, the higher the risk of seeing multiple rate cuts later. There are signs that the economic environment is already weakening. For instance, rising consumer delinquency rates signify how higher rates are beginning to impact spending again.

From a corporate perspective, organizations are in the process of refinancing their debts. They're encountering a speed bump as they renegotiate their loans at significantly higher rates than they were prior to the pandemic. This could potentially cause broader economic issues. Currently, the consumer is managing, but their spending is starting to slow down. This would eventually lead to margin compression in corporations that are refinancing at higher rates.

If these corporations experience diminished margins, the situation could worsen. After all, the consumer's finances will be impacted by margin compression in the sector that they rely on. This could lead to a cyclical downturn.

### Disneyland Character Performers Unionize

Just like Mickey, Minnie, Donald, and Goofy, hundreds of Disneyland Resort employees who perform as characters and in parades around the park in Anaheim, California have joined the union, Actors' Equity Association.

After three days of voting, 953 of the 1,700 Disneyland Resort cast members who play these roles voted in favor of unionization, while 258 voted against it.

While there are more than 21,000 Disneyland "cast members", employees such as retail workers, food service employees, security personnel, pyrotechnic workers, and hair and makeup artists, have already been represented by various unions.

Previously, character performers were left out of union representation. However, this has recently changed as they voted to join Actors' Equity Association.

Equity President Kate Shindle expressed her excitement for collaboration with these new union members, saying they will "collaborate with them about improving health & safety, wages, benefits, working conditions, and job security."

The National Labor Relations Board is expected to certify the results next week, and bargaining with The Walt Disney Company will begin afterward.

Uber and Lyft Reach Minimum Pay Agreement with Minnesota Lawmakers

Minnesota lawmakers have reached an agreement with rideshare companies Uber and Lyft regarding minimum wage standards for drivers, after a year of deliberation.

Democratic state officials and the two companies have been at loggerheads over a Minneapolis ordinance passed in August 2021 that aimed to provide increased protections for contract workers taking gigs on platforms like DoorDash, Instacart, Uber, and Lyft. This ordinance originally mandated drivers be paid at least $1.40 per mile and $0.51 per minute.

However, the companies threatened to withdraw from the state, prompting lawmakers to focus on achieving a compromise before the July 1 deadline.

The new agreement has resulted in a statewide minimum wage rate of $1.28 per mile and $0.31 per minute for rideshare drivers. This will supersede the previously proposed rate by the Minneapolis City Council.

Democratic House Majority Leader Jamie Long stated that the blended rate of $1.28 per mile and $0.31 per minute represents a 20% increase in pay for drivers in Minnesota. Read more here. 2

Walmart raises wages for employees to counter labor shortage

In an effort to address the ongoing labor shortage, Walmart has announced plans to raise wages for its workers.

The retail giant will boost the minimum pay for its 1.6 million US employees by at least $1 an hour, with some workers potentially receiving up to a $3 bump. The new scale will take effect in February 2023.

Walmart is also raising wages for some workers outside of customer-facing jobs. Warehouse associates and truck drivers are included in the wage increase, meaning that 56% of its workforce will receive the change.

Walmart's decision to raise wages may not be entirely altruistic. The company, the largest private employer in the US, felt the effects of the labor shortage during the holiday shopping season, and CEO Doug McMillon acknowledged the company was losing business because it "simply couldn't staff" stores.

7-Eleven plans to raise minimum wage for over 80,000 employees

7-Eleven has announced its intention to raise the starting minimum wage for its 84,000 employees in the US by 25%, from $10 per hour to $12.50 per hour.

The move comes as the convenience store chain, which has 30,000 locations in the US, admits it's also experiencing a labor shortage.

CEO Joe DePinto expects the wage hike to be finished by December, following negotiations with local franchises which own most of 7-Eleven's US locations.

“This pandemic has been a great equalizer for us,” DePinto said in a recent interview with The Wall Street Journal. “It's a good time to make big changes.”

According to DePinto, 7-Eleven raises wages every year, and its biggest increase before was 10% back in 2018 when the minimum wage was raised by $1.50. The latest hike is double that.

The move is seen as a response to pirates looking for "easy money" and the increased competition for labor.

3 4 5

Read also:

In the context of the economy, investors might be considering the potential impact of the Federal Reserve's decision on interest rates, given that lower rates could create opportunities for businesses to invest and grow.

Following the discussion about the Federal Reserve's policy, investors might be closely watching the economic landscape to gauge how lower interest rates might influence various sectors, including businesses that rely on favorable financing conditions to expand their operations.

Source: edition.cnn.com