The air crackled with anticipation as the Federal Reserve met this week. Would they finally loosen their grip on interest rates, a move desperately craved by investors and businesses alike? Or would they remain vigilant, their hawkish eyes fixed on the ever-present specter of inflation?
The answer, much like the Fed's current stance, was a frustrating tightrope walk. Chair Jerome Powell acknowledged the recent cooling of inflation, a relief after its scorching two-year rampage. But with a cautious glint in his eye, he set a seemingly insurmountable bar for rate cuts, calling it a "highly consequential decision."
This cautious approach, while understandable, carries its own risks. Just as inflation was the enemy we knew, waiting for absolute certainty before acting could unleash a new foe: recession. The economy, currently humming along, might suddenly find itself wilting under the weight of high interest rates for too long.
Remember, the Fed hiked rates to 5.25% for a reason: to tame inflation that was running amok. But the landscape has shifted dramatically. Core inflation, stripped of volatile food and energy prices, has plummeted to a respectable 1.9%, exceeding even the Fed's wildest optimistic projections. This wasn't achieved by stifling demand – growth and employment remain robust – but by an improvement in supply chains.
So, the question begs to be asked: has the Fed overshot its mark? Are these high rates, now exceeding inflation-adjusted levels, doing more harm than good? Perhaps it's time to take a page from March 2022, when the Fed envisioned a much lower equilibrium rate of 2.8%. Economists, wielding the ever-helpful Taylor Rule, suggest rates as low as 3.47%.
Cutting rates, however, is a delicate dance. Inflation, though subdued, could always rear its ugly head again. Some of the recent decline might be temporary, and the ever-present global energy market remains a tinderbox. Additionally, a strong economy could fuel price pressures further.
Therefore, the Fed's approach should be measured and surgical. A small, initial rate cut wouldn't unleash the inflationary Kraken, but it would signal a willingness to adapt to the changing economic landscape. It would also provide much-needed relief to businesses and households struggling under the weight of high borrowing costs.
The Fed doesn't have to vanquish inflation entirely; it just needs to keep it in check. This can be achieved without sacrificing economic growth or resorting to unnecessarily high rates. It's time for the Fed to acknowledge the new reality and adjust its policy accordingly.
