Powell's Perverse Policies Persist

Today on TAP: A flawed understanding of today’s mild inflation leads the Federal Reserve to keep interest rates punishingly high.

BY ROBERT KUTTNER JULY 31, 2024

The Fed had every good reason to begin the process of reducing interest rates at today’s meeting of the Federal Open Market Commitee. Yet once again, Fed Chair Jay Powell and his colleagues refused to cut rates, keeping the target range for short-term rates at 5.25 to 5.5 percent, a 23-year high. Given the state of the economy, the Fed’s stubborn stance makes no sense.

Recent government reports on growth, jobs, and inflation showed an economy that was defying predictions of both renewed overheating or a drift into recession. Second-quarter growth was a sustainable 2.8 percent, while inflation as measured by the Fed’s preferred indicator, the Personal Consumption Index, continued to decline to an annual rate of just 2.5 percent.

The reports also showed that investment in equipment increased by an impressive 1.6 percent, suggesting a solid basis for future growth. And they showed that personal savings rates were down, meaning that people are having to borrow to sustain consumption. That in turn suggests that wages are far from adequate, and are not a source of inflation.

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The problem with this stance is threefold. First, the Fed itself has become a prime source of inflation. High interest rates increase costs for homebuyers and builders. As people rely on credit card borrowing to sustain living standards in the face of inadequate wages, those costs increase as well. And higher small-business borrowing costs are passed along to consumers in the form of higher prices.
https://prospect.org/blogs-and-newsletters/tap/2024-07-31-powells-perverse-policies-persist/