Time for the Fed to Declare “Mission Accomplished”
Time for the Fed to Declare “Mission Accomplished”
Today’s Consumer Price Index report sends a clear message: It is time for the Federal Reserve to declare “mission accomplished” in its war against inflation, stop fighting the economy, and turn its focus to the employment part of its mandate.
U.S. consumer prices rose 0.2% in July and were up 2.9% from a year earlier. Core prices, excluding food and fuel, rose 0.2% in July and were up 3.2% from a year earlier. Zooming in, core inflation was 2.0% in the past month on an annualized basis, and 1.6% over the past three months.
Housing costs contributed nearly 90% of overall inflation. If you take housing out of the picture, then core inflation was -0.2% in the past month on an annualized basis, -0.3% over the past three months, 1.5% over the past six months, and 1.8% over the past 12 months.
High interest rates have been far less effective in bringing down shelter costs than many economists expected. That is because the central problem with housing affordability in the U.S. is an acute undersupply. In many ways, high interest rates have made the problem worse, with rate lock trapping homeowners in their homes and encouraging older Americans to age in place, and high rates discouraging real estate investors from taking out loans to finance the construction of houses and apartments.
In that context, it is hard to see much further macroeconomic benefit to keeping the effective federal funds rate at 5.33% any longer. Fed Chair Jerome Powell has long stressed that the Fed doesn’t need to wait until inflation actually reaches 2% to cut borrowing costs. “If you wait until inflation gets all the way down to 2%, you've probably waited too long,” Powell has said, because monetary policy operates with a lag both on the way up and on the way down.
Consumer loan growth, commercial and industrial loan growth, and real estate loan growth at banks have all slowed sharply over the past year. That squeeze on the availability of credit now will have an effect on the rates of investment, business expansion, and hiring for several months yet to come.
If the Fed keeps its foot on the brake pedal, the labor market will continue to slow. Unemployment will continue to rise, and businesses—unable to afford loans to finance new investments—will be forced to stagnate and allow exciting growth opportunities to pass them by.
Part of the cost will be the loss of some existing jobs, marked by the continued gradual uptick in layoffs, initial jobless claims, and continuing claims. But a much larger cost will be the loss of potential new jobs, with businesses continuing to shelve their growth plans and delay new hiring. That toll will show up in the hiring rate, unemployment rate, and underemployment rate. New graduates, new immigrants, and parents who are ready to return to the labor force after a period of focusing on childcare will find it even more of a struggle to get jobs.
A large enough increase in the unemployment rate could even tip the economy into an entirely avoidable, self-inflicted recession by setting off a vicious job loss → spending cut → revenue decline → job cut cycle.
It’s arguably past time for the Fed to shift its focus to managing that risk. Just as it made several 75 bps rate hikes on the way up when it realized it was behind the eight-ball, 50 bps and 75 bps cuts should be on the table now. A Taylor Rule-based monetary policy framework would already have the Federal Funds rate back down at the likely long-run rate of around 2.5%.
Take a tour of the latest data on inflation through ZipRecruiter charts.
