Why the Fed Should Resist Pressure to Reduce Interest Rates Now
While Greg Ip’s analysis is sound, his conclusion is not.
Analysis
Last week Wall Street Journal columnist Greg Ip argued that the Federal Reserve should reduce interest rates now, one year after their being raised to a recent high of 5.25–5.5%.
Mr. Ip showed that rising unemployment at 4.1% probably reflects the growth of migrant labor, while the household survey shows weak job growth. He showed that high interest rates haven’t slowed the growth of the economy, due to most homeowners’ having low-interest mortgages.
With all of that in mind, he asserts that it’s time for the Fed to lower the discount rate from the current 5.25–5.5%.
Conclusion
Mr. Ip’s conclusion that it’s now time for the Fed to drop rates to stimulate the economy might be in line with the markets’ expectations, but it does not reflect the effects of the long, tortured years of ever-growing inflation on American households.
- Americans have experienced overall inflation of more than 21% during the last 42 months.
While the sixteen Fed interest raises have slowed, and finally reversed, the trend of growing inflation, the declining rate does not justify that inflation is still higher than the acceptable level.
- For the last 39 months, inflation has never been below 3%, while the Fed’s target for the economy remains 2%.
While the rate of inflation reached 3% one year ago, yet it hasn’t gotten below that in the year since, the Fed’s current regime hardly appears to be the answer to achieving its goal.
For most of 2024, many economists have been predicting or hoping for lower rates.
On the contrary, six months ago, I recommended that the rate be raised by another 0.5%, just to shock the markets.
If the discount rate remains at 5.25–5.5%, monthly levels of inflation are likely to decline, but given the slow rate of inflation’s decline in the last twelve months, it’s likely to take 12–18 months to reach the acceptable level of 2%. That would mean that American households would have to endure even more months of suffering under the Fed’s guidelines for a “gentle landing” of the economy.
On behalf of the American household, I say “goose” the interest rate up another half point now to enable an earlier relief to our inflation headache.
