The "Do Nothing Fed" Needs to Act Now
- Don Schreiber, Jr.
- Aug 5, 2024
- 1 min read
The Federal Reserve’s current stance on interest rates is concerning, as it appears they may have kept rates too high for too long, potentially leading the U.S. economy toward a recession. While the Fed has managed to control inflation, the economy is now slowing down with initial and continuing jobless claims on the rise.
Clinging to an arbitrary 2% inflation target seems unwise and potentially dangerous. There is limited empirical evidence to support the idea that the U.S. economy can sustain healthy growth and full employment under such restrictive interest rate policies. The ideal inflation rate can vary depending on specific economic factors such as productivity growth, demographic trends, and external conditions. Some economists advocate for a higher target, such as 3-4%, especially in a low-interest-rate environment where monetary policy has limited flexibility. However, consumers are starting to feel the burden of higher rates as evidenced by a steep drop in consumer sentiment.
Inflation targeting is intended to provide stable economic growth and full employment, but it is not a one-size-fits-all solution. Economic conditions, structural factors, and policy effectiveness all play a role in determining whether this target is suitable for a particular economy at a given time. Economic growth or recession often serves as the best indicator of whether a specific inflation target and accompanying Fed interest rate policy are appropriate.
The weak and faltering July economic and employment reports suggest that the current interest rate policy is too restrictive. Rather than maintaining the status quo, the Fed should consider loosening its rate policy immediately.
