The WSJ’s Nick Timiraos gets a bit into the weeds today in a column that highlights how borrowers might be reluctant to tap lower rates. That could make it more difficult for the Fed to generate an uplift in economic activity or stall the rise in unemployment.
For me, the most important part of the dot plot is the peak of 4.4%-4.5% in unemployment. That’s just 2-3 ticks above the current level and is an optimistic view of what rate cuts to still-high levels can achieve. It argues that Fed may have to cut more-swiftly and that’s something the market is sniffing out.
Timiraos says this dynamic could make people and companies reluctant to borrow:
At issue is the difference between the marginal cost of debt, which is now falling, and the average rate on debt, which might still rise, particularly for borrowers who locked in low rates before the Fed started hiking. Because the Fed raised rates rapidly after more than a decade of historically low borrowing costs, the average rate on debt in many sectors is still lower than the marginal cost of new credit, even with a central bank that is cutting rates.
He also highlights at how weak commercial and industrial lending has been.
Eyes are also on housing, where rate cuts haven’t sparked a flood of demand. Some of that may come down to the knowledge that rates will fall further: Why buy now when you can get cheaper borrowing later?
On the whole though, Fed cuts will do the job, this is more of a reminder of the long and variable lags.