As Other Central Banks Around The World Cuts Rates And Prices Collapse, The Federal Reserve Holds Rates High
The Bank Of England cut its interest rate on May 8 by 0.25 percent to 4.25 percent.
The Bank of China cut its rate on May 6 by 0.1 percent from 1.5 percent to 1.4 percent.
The European Central bank cut its rate on April 16 by 0.25 percent to 4.25 percent.
The Bank of Korea cut its rate on Feb. 25 by 0.25 percent to 2.75 percent.
All are forecasting cooling inflation and slowing growth in their outlooks, which usually happens at the end of economic cycles and signals it’s time to lower rates.
But in the U.S., the Federal Reserve on May 7 bucked that trend and kept its own federal funds rate elevated at 4.25 percent to 4.5 percent, and is continuing to sell its treasuries and mortgage-backed securities holdings, thus keeping market interest rates artificially higher.
This despite the fact that inflation at 2.4 percent, its lowest since March 2021, has been cooling for almost three years now, and unemployment at 7.16 million, its highest since October 2021, has been rising for more than two years.
Criticizing the move, President Donald Trump on Truth Social on May 8 stated that the Fed was acting “too late”: “‘Too Late’ Jerome Powell is a FOOL, who doesn’t have a clue. Other than that, I like him very much! Oil and Energy way down, almost all costs (groceries and ‘eggs’) down, virtually NO INFLATION, Tariff Money Pouring Into the U.S. — THE EXACT OPPOSITE OF ‘TOO LATE!’ ENJOY!”
The President has got a point. It would not be the first time the Fed was slow to act.
During Covid in 2020, it brought its policy rate to near-zero percent, leaving it there all the way through 2021 even as inflation was already above 5 percent by June 2021.
By the time January 2022 rolled around the inflation rate was already up to 7.5 percent as global production was slow to catch up to the reopening economy following the pandemic. It was not until after Russia invaded Ukraine the Fed stepped into action and started hiking rates, something it could have started in 2021.
Instead, at the time, the Fed was favoring the maximum employment side of its dual mandate.
Now, after being caught off guard by the inflation of 2021 and 2022, where it peaked at 9.1 percent in June 2022, the central bank appears to be favoring stopping inflation side of its mandate.
Generally, the unemployment rate at 4.2 percent is near historic lows, although is up from April 2023’s low of 3.4 percent as it has slowly but steadily increased the past couple of years. It could be that the Fed is okay with an unemployment rate higher than that if it means avoiding more inflation.
While there was no mention of tariffs in the central bank’s May 7 release, it did come up quite a bit in Federal Reserve Chairman Jerome Powell’s news conference, where Powell expressed uncertainty about whether inflation would go up again thanks to tariffs: “If the large increases in tariffs that have been announced are sustained, they’re likely to… generate a rise in inflation, a slowdown in economic growth, and an increase in unemployment.”
But Powell could not decide if the impacts would be short-lived or not: “The effects on inflation could be short-lived, reflecting a one-time shift in the price level. It is also possible that the inflationary effects could instead be more persistent. Avoiding that outcome will depend on the size of the tariffs … on how long it takes for them to pass through fully into prices and ultimately on keeping longer term inflation expectations well anchored.”
In the meantime, prices have been slowing and globally, commodities like oil have been dropping amid increased production by OPEC. Meaning the higher inflation expected by some might not materialize across the board as anticipated. As it is, the Fed might be waiting for unemployment to go much higher before it decides to move at all and could be late to the party again. We’ll see. Stay tuned.
Robert Romano is the Executive Director at Americans for Limited Government Foundation.
Reproduced with permission. Original here: As Other Central Banks Around The World Cuts Rates And Prices Collapse, The Federal Reserve Holds Rates High
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