Inflation Reports Spur Hope of Monetary Relief
It is probably too late for the central bank to avert an economic downturn, but the longer the Fed waits, the worse it will be, so let's have the inevitable rate cuts asap.
The most recent inflation report for the United States showed the consumer price index falling slightly, to a 3 percent annual rate. Core prices have risen 3.3 percent from a year earlier, after the mildest monthly increase since President Joe Biden took office in January 2021.
The slowing of inflation is attributable to intense monetary tightening by the Federal Reserve since 2022 and the tacit agreement between the Biden administration and House Republicans to keep increases in federal spending at merely highly irresponsible levels as opposed to the disastrous binge of 2021-2022.
This fiscal and monetary pullback from the abyss has increased unemployment enough to make the Fed governors happy and will allow them to start lowering interest rates later this year. With the slowing of the increases in wages and prices, the Fed is finally nearing the point where it can claim that 3 percent inflation is close enough to its announced goal of 2 percent to allow a slight loosening of monetary policy. A 50 percent miss is as good as a hit, I guess.
Of course, the inflation numbers are inaccurate for a variety of reasons, as I have noted many times previously, but they are the Fed’s compass, so we’ll just have to follow along.
The lowering of interest rates is intended to help reduce the monetary restrictions on the economy that have created troubles in companies big and small across the country. Whether it will arrive in time to avert an overall economic slowdown is anybody’s guess.
When faced with inflation or recession, the Fed has generally adjusted the money supply too late, too much, too slowly, and for too long. We are now in the “too long” phase of the cycle.