Fed leans back on another mistaken rate cut
Fed officials appear intent on repeating the mistakes of September and November by cutting rates again next time. Economic indicators clearly need a pause.
Fed Governor christopher wallerSpeaking in Washington, he announced tentative intentions to cut interest rates at the Federal Open Market Committee meeting in December, citing data that could point to easing inflation.
“At this point, we are leaning toward supporting a rate cut at the December meeting,” Waller said. “But that decision will depend on whether the data available by then shows unexpected upside and changes my expectations about the path of inflation.”
President of the New York Fed John Williams Atlanta Fed President Raphael Bostic He expressed similarly cautious support for future cuts.
This chorus of dovish sentiment would be understandable if the economy were in a downturn, but that is not the case. Last quarter's gross domestic product grew at a steady annual rate of 2.8%. The Federal Reserve Bank of Atlanta's GDPNow indicator includes: Economic growth rate in the fourth quarter was 3.2%.
Federal Reserve Chairman Christopher Waller speaks at the Peterson Institute for International Economics in Washington, DC, on May 21, 2024. (Federal Reserve System via Flickr)
On Tuesday, the Labor Department Recruitment/Turnover Rate Survey (JOLTS) It was revealed that employers were considering hiring workers for 7.744 million positions as of the end of October. This represents a significant increase from September and exceeded even the most bullish economists' predictions. Unemployment claims have declined for the third consecutive week and remain at very low levels. Attrition is increasing, demonstrating workers' confidence in the health of the labor market.
Private consumption remains strong, supported by a resilient labor market. Retail sales rose 0.4% from September to October. In-store Black Friday sales may be disappointing, but this is likely due to strong online purchases and holiday shopping habits shifting to earlier in the season It is thought that.
of thanksgiving travel period has provided us with an eye-catching data point that serves as a barometer for consumer confidence and the economy as a whole. According to the TSA, U.S. airports welcomed a record 3.09 million travelers on Sunday, Dec. 1. Busiest day recorded in agency data. Air travel volume for the 10-day period from the Friday before Thanksgiving to the Sunday after Thanksgiving was 3.6% higher than last year and 9.3% above 2019 pre-pandemic levels.
Construction spending rose 0.4% last monthwas double the forecast and increased by 5.0% from the previous year. Additionally, although the Japan Institute for Supply Management's manufacturing economy index still suggests contraction, it improved in November and exceeded expectations.
Yet we are here with the policy makers. signals that it is prepared to lower interest rates furtherDespite three interest rate cuts since September and already excessive economic stimulus. This is a mistake, rooted in a misreading of both the inflation outlook and the labor market.
Inflation is not “fixed”
Waller pointed out: Core inflation remains “viscous”, especially in the services sector. The personal consumption expenditure (PCE) price index, which excludes food and energy, rose 2.8% in the 12 months to October. That's an advance from the 2022 high, but far from the Fed's 2% goal. As Joe LaVogna, chief economist at SMBC Nikko Securities, pointed out in a recent note to clients, the three-, six-, and 12-month rate of change in the global economy is Core PCE price index is no longer improving or is actually accelerating.
Even more problematic is the complacency of Fed officials. Mr Waller insisted there was “no indication” that prices in key service categories would remain high, but history offers little reassurance. Inflation is a process, not a moment. Relaxing the brakes prematurely risks reigniting price pressures.
Deceptive balance in the labor market
Fed officials appear to agree as well. Too negative about the labor market. Mr Waller suggested the job market was in “balance”, while others pointed to signs of wage restraint. However, these signs are far from conclusive. Strikes, storms, and other temporary disruptions muddy the data, making it dangerous to draw comprehensive conclusions.
moreover, Just because the labor market is “in balance” doesn't mean the Fed needs to ease policy.. On the contrary, it is precisely this kind of equilibrium that allows financial restraint to operate throughout the economy without causing significant harm. Cutting rates now would send a confusing message about the Fed's commitment to its obligations and risk undoing hard-fought inflationary progress.
The Fed should hold the line
An old saying goes like this: Stop digging when you're in a hole. The Fed dug an inflation hole in 2021 by being too slow to tighten policy and too eager to adopt flawed frameworks such as average inflation targeting. The economy is now starting to pick up, but there is a risk that it will fall again if interest rates are cut too soon.
Officials should heed the lessons of the past. There has been a lag in the implementation of monetary policy, meaning that the effects of this year's interest rate hikes have not yet been fully felt. The current rate cut would result in: declare victory in a battle that is still raging.
Chairman Jerome Powell and his colleagues take a step back and reevaluate. The economy is growing, inflation remains above target, and the labor market is far from fragile. These are not conditions that require monetary easing. those are the required conditions patience and discipline.
The Fed's next meeting will be an opportunity to show the resolve that has been lacking in recent months. by maintain stable interest ratesauthorities can strengthen their credibility, maintain inflationary progress, and avoid costly policy errors. If they have the courage to do it, the choice is clear.
