OPINION:
Federal Reserve Chairman Jerome Powell has decided the economy needs easy money again and is betting that inflation will soon die.
Earlier this month, the Fed slashed the federal funds rate by half a percentage point instead of the usual quarter point, marking the beginning of a rate-cutting cycle. In recent decades, such a strong initial move has been reserved for events such as the rise in mortgage delinquencies at the onset of the 2007-2009 global financial crisis.
No such calamity is apparent.
At 4.2%, unemployment is still low by historical standards. Layoffs are not occurring at breakneck speed, and Mr. Powell expects economic growth to continue at a 2.2% annual pace.
Acting on the Fed’s dual mandate to maintain price stability and maximize employment, he believes that “inflation is moving sustainably toward 2%” and inflation expectations are “well anchored.”
Those anchored expectations are hardly at 2%.
The average of the University of Michigan, New York Federal Reserve Bank and Conference Board surveys indicates consumers anticipate prices will rise more than 3% over the next year.
That’s no surprise.
Vice President Kamala Harris, the Democratic presidential nominee, says price gouging at grocery stores and housing shortages require federal intervention. Ordinary people are enduring higher rents and rising prices for homeowners and automobile insurance and other services.
The progress on inflation has been on the goods side — the property crisis in China is pushing down the demand for oil and flooding global markets with cheap manufacturers.
Chinese troubles are a thin reed on which to lean U.S. monetary policy.
In August, the consumer price index was up 2.5%, but core inflation — prices less energy and food — is still rocking along at 3.2%.
Rents are up 5%, and the cost of shelter is generally up 5.2%. Builders face building lots, labor shortages and rising regulatory costs.
Services prices, less housing and energy, are rising 4.5% annually, and that pressure shows little sign of significantly abating.
In August, the economy added 142,000 jobs — well above the 80,000 possible based on population growth and regular legal immigration. The added boost comes from migrants receiving temporary asylum and others just spiriting into the country.
Though President Biden has tightened the border somewhat, illegal immigration remains well above the pre-COVID pace. The surge of immigrants likely accounts for much of the increase in unemployment from 3.4% last year and is among indicators of an imminent recession based on the joblessness count.
Employers’ needs are shifting, for example, in the tech sector. Microsoft, Alphabet, Apple and Meta lay off workers in some aspects of their businesses as they hire to invest heavily in new artificial intelligence tools.
Overall investment spending has improved this year thanks partly to surging purchases of Nvidia processors, servers, new data centers and electrical grid capacity.
Overall, layoffs have not elevated to the level that would create a self-feeding cycle of job cuts, lower consumer spending and consequential furloughs.
Mr. Powell got it wrong in 2021 when he said the surge in inflation would be transitory. Still, he maintains, “the good ship Transitory was a crowded one, with most mainstream analysts and advanced-economy central bankers on board.”
He attributes the debacle to COVID-19 and other supply disruptions, but the Fed enabled trillions in pandemic-era federal relief by printing $4.8 trillion to purchase Treasury securities.
In the run-up to the September meeting, several hawkish Fed board members, such as San Francisco Fed President Mary Daly and Fed Gov. Christopher Waller, indicated the time was ripe for interest rate cuts, and commentators such as Greg Ip at The Wall Street Journal and former New York Fed President Bill Dudley called for a half-point rate reduction.
Now, large rate cuts will create a surge in liquidity again. For example, they will permit banks to borrow and raise money more cheaply and charge less for credit card balances, auto loans, home equity loans and mortgages. Small businesses that rely on revolving lines of credit should get lower rates, too.
Don’t be surprised if inflation jumps again next year — as it did under Chairman Arthur Burns when he abandoned monetary discipline to boost the Nixon economy and Chairman Paul Volcker the first time he raised interest rates and then pulled back too soon to combat a recession.
Ultimately, draconian interest rate increases were needed as inflation spiraled through successive incomplete attempts to stabilize prices.
Over 100 experiences with inflation across 56 countries since the 1970s indicate premature celebrations and interest rate cuts generally cause inflation to come back, more unemployment and greater macroeconomic instability.
On average, it takes over three years to lick inflation — the Fed quit after 30 months.
Mr. Powell can alibi that all the other children said we should do it, but he’s rolling the dice on the U.S. economy.
• Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.
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