Inflation Pressures Are Easing but Rate Cut Forecast Remains Uncertain

The New Year is beginning where the old one ended -- with uncertainty about when – or whether – the Federal Reserve will begin cutting interest rates.

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Industry executives and analysts who have been holding their breath for the Federal Reserve to begin raising interest rates haven’t exhaled yet. The Fed opted in September to delay that long-anticipated move, as concerns about the international financial climate – weakness in the Chinese and European economies in particular – trumped concerns that keeping the Fed Funds rate at zero for too long risks igniting inflationary pressures.

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When will the Federal Reserve raise interest rates? Analysts, business executives and consumers have been asking that question with increasing intensity for the past two years. The July employment report may have brought the Fed closer to answering it.

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Will they or won’t they? No one, possibly including Fed officials themselves, knows for certain whether the Fed will increase interest rates in September. The consensus had been leaning very much in that direction until China’s weakening economy, and the ham-handed governmental efforts to bolster it, roiled international financial markets, sending stock markets on a stomach-churning roller-coaster ride, with no clear indication of when and where — up, down, down a lot, somewhere in between — the ride will end.

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After triggering a bad case of economic jitters in May, the employment report brought a measure of relief in June as employers added 287,000 workers to their payrolls. That stronger—than-expected performance, following a dismal increase of only 38,000 workers in May, tempered fears that the economy might be losing ground, but left uncertain the timing of the interest rate increase the Federal Reserve has been eyeing, but deferring, for most of this year.