At its September 2024 meeting, the Fed’s FOMC cut the target federal funds rate by a historically large 50 basis points and then justified this cut on the grounds that “The Committee has gained greater confidence that inflation is moving sustainably toward 2 percent, and judges that the risks to achieving its employment and inflation goals are roughly in balance.”
The FOMC again cut the target rate in November and then again in December. Each time, the FOMC’s official statement said something to the effect of “[price] inflation is headed to two percent. Specifically, the November statement said “[Price inflation] has made progress toward the Committee’s 2 percent objective.” The December statement said exactly the same thing.
It remains unclear what motivated the FOMC to slice the target rate so drastically in September. Was it a cynical political ploy to stimulate the economy right before an election? Or was the Fed spooked by weak economic data? We don’t know, and the Fed is a secretive organization.
But whatever the Fed actually believes, the committee’s claims about “greater confidence” in falling price inflation is now gone. The FOMC announced in January that it would not lower the target rate, and the FOMC also removed from its official statement the line about making progress “toward the Committee’s 2 percent objective.” That sentence disappeared from the written statement, although Powell, in the press conference, apparently felt the need to remind the audience that “Inflation has moved much closer to our 2 percent longer-run goal…” He nonetheless failed to mention anything about continued progress.
It looks increasingly like all that confidence about “sustainable progress” on price inflation back in September—in the heat of election season, of course—was just one of the Fed’s many bogus, politically motivated forecasts.
Even if the Fed truly is motivated by the official data, though, it’s clear that the Fed now has good reason to downplay talk of declaring victory on the Fed’s two-percent inflation goal.
Recent official data—which generally reflects the best scenario that government bean counters can muster—shows plenty of bad news in this area. According to the Fed’s preferred inflation measure—PCE inflation—year-over-year price inflation reached an eight-month high in December, at 2.6 percent. (December is the most recent available number on PCE.) If we look at January’s headline CPI inflation, released on Wednesday, the picture is even worse. Year-over-year CPI inflation hit a nine-month high in January, at 3.0 percent, and month-to-month growth was at an eighteen-month high of 0.5 percent.
Thanks to the Fed’s unrestrained embrace of monetary inflation from 2020 to 2022, American consumers are still facing the grim reality of rising prices on basic necessities. In January’s CPI report, some of the largest jumps in prices were in food (2.5 percent), energy services (2.5 percent), other services (4.3 percent) and shelter (4.4 percent).
Wholesale prices also suggested that we won’t be seeing much relief from price inflation. According to new producer price index numbers, released on Thursday, year-over-year growth in the PPI reached a 24-month high of 3.5 percent. This is bad news for those hoping that the Fed’s predictions of falling prices might somehow come true. CNN delivered the bad news on Thursday: “The stronger numbers seen in Thursday’s PPI will tend to translate into continued consumer price inflation through the middle of the year.”
So much for the Fed’s dog-and-pony show of late summer 2024 when Jerome Powell repeatedly assured the public that the economy was in great shape and that price inflation was rapidly disappearing.
What the Fed Should Do
So, what should the Fed’s FOMC do now? The answer: “nothing.” Observers of Fed policy often speak in terms of the Fed “setting” interest rates or “raising” the target rate. In truth, the Fed doesn’t set rates, and it doesn’t raise interest rates, either. The Fed can allow interest rates to rise by intervening less in debt markets. If the Fed just backs off from its endless manipulations through its open market operations, the Fed won’t be buying assets with newly created money and directly driving more price inflation.
After so many years of forcing down interest rates, if the Fed just took a break from its constant meddling, interest rates would naturally rise. That would lead to bankruptcies among zombie companies and other enterprises that can’t survive without a constant infusion of new, cheap money. On the other hand, the bubble economy would start to heal, prices would fall, and prospective first-time home buyers might have a chance of actually buying a home. Ordinary people who can’t afford hedge fund managers might be able to actually make some money on investments again as interest rates on ordinary investments rise to more normal levels.
This is what the Fed should have been doing in September instead of manufacturing new excuses as to why it needed to cut rates again. Of course, the Fed never just sits back and lets the market function freely, because it is a political institution. It does what the regime asks of it, whether it’s for short-term stimulus, or when the federal government asks the Fed to push down interest rates to keep interest payments on the huge federal debt manageable.
With Trump in office, it looks like there’s no break in the usual politicians’ calls for easy money. Indeed, it only took six weeks in office, and Donald Trump is back to demanding that the central bank force down interest rates. According to Bloomberg on Wednesday: “President Donald Trump called for lower interest rates, seeking to raise pressure on the Federal Reserve as he moves to implement a second-term economic agenda high on tariffs and expanding tax breaks. ‘Interest Rates should be lowered, something which would go hand in hand with upcoming Tariffs,’ Trump said Wednesday in a post on social media.”
Is this a tacit admission that tariffs are a tax and will therefore slow the economy? Is Trump admitting he needs more easy money to keep up the appearance of a growing economy?
Whatever the thinking is, forcing down interest rates even further will not benefit ordinary people. They’ll just bring price inflation, malinvestment, and more of the same stagnation that that only looks like growth thanks to runaway government spending and record-breaking deficits.
