Has the Fed already waited too long to cut rates?
Most people who keep tabs on the Federal Reserve would say it waited too long to raise interest rates when inflation took off in 2021. Now the US central bank is arguably falling behind the curve again as inflation moderates and policymakers stall on bringing rates back down. The risk in waiting is that high rates may finally start to inflict harm on an economy that’s so far managed to defy widespread expectations for a significant slowdown.
The Fed is in the long-awaited last mile of its campaign against the bout of pandemic-induced inflation that saw policymakers’ preferred gauge accelerate from 1.8% in February 2021 to a four-decade high of 5.6% in February 2022. Bloomberg Economics estimates data out later this month will show it had returned to 2.8% as of February 2024. That would put it more than three-quarters of the way back to the central bank’s 2% target from the peak two years ago. Yet at their meeting on March 19-20, Fed officials unanimously elected to hold the benchmark federal funds rate in a range of 5.25 to 5.5%, where it’s been since last summer.
Why the delay? One reason is that monthly inflation reports for January and February showed a slower pace of moderation than in the previous six months. But the latest data don’t entirely explain the reluctance to cut. After all, Fed Chair Jerome Powell made it clear at the end of January—before those
Group Inc. (In December, Mericle was among those who anticipated rate cuts commencing in March, but he’s since pushed out his projection to June.)
Perhaps the easiest way to illustrate the Fed’s foot-dragging on rate cuts—and its delayed rate hikes, for that matter—is with the Taylor rule, a standard textbook equation that calculates an appropriate interest rate based on where the inflation and unemployment rates are.
The rule prescribed rate hikes in early 2021, when inflation began accelerating, but the Fed waited a full year to begin tightening. It finally caught up to the rule’s suggested rate level with its last hike, in July 2023. Since then the rule has indicated the rate should move down to 4%—because price pressures