Thread the needle

Inflation has caused real damage to Americans least able to weather financial shocks, putting families in the position of having to choose between rent and medicine and food, or filling up gas tanks and the hope that their cars won’t roll to a stop before the next paycheck. The most significant administrative lever to deal with these headwinds lies in the hands of the Federal Reserve, which has reasonably responded by raising interest rates more abruptly than at any time in the last 40 years, including two consecutive 0.75 percentage point bumps. That, for now, should be enough.

The Fed should not forget that, as painful as the diminishing spending power of a paycheck is, it is far less painful than watching that paycheck disappear entirely with the loss of a job, which is what could happen to millions of Americans if too-aggressive action craters the economy. The Fed can only affect the demand side of the economic equation, and so it’s been its explicit goal to tamp down on wages and strong employment to force down the market for goods and services that shocks from COVID to the Ukraine war have made scarce.

This is all unsavory but a needed remedy to avoid prices spiraling out of control. Yet too much medicine can be a poison, and additional rate hikes should be viewed with skepticism as some important indicators start to trend in the right directions. In recent weeks, for example, the price of oil has been dropping again, and the comparative decline in wages from high prices is itself softening demand.

Too aggressive short-term action can have longterm negative impacts, including a continuation of a long-standing trend of home construction not keeping pace with demand. Higher interest rates disincentive development, which as we know well in New York City, is a recipe for crisis-level rental prices. For now, the Fed is keeping its cards close to the vest. It must think thrice before bringing on more hikes.