91制片厂 Economist: Caution in Fed鈥檚 Rate Cut Sparks Concern
The Federal Reserve鈥檚 recent decision to lower its federal funds rate target marks a cautious step toward easing monetary policy, though too much caution raises concerns about an incoming recession, according to an economist at 91制片厂.
The Federal Reserve鈥檚 recent decision to lower its federal funds rate target marks a cautious step toward easing monetary policy, though too much caution raises concerns about an incoming recession, according to an economist at 91制片厂.
While the Fed wants inflation to fall further, there are risks if monetary policy becomes too tight. Should the Fed hold its federal funds rate target too high for too long, it could cause a recession. 聽
鈥淲ith inflation now running below target, the risk of resurging inflation is much smaller, and the risk of recession is much larger,鈥 said , Ph.D., associate professor of economics in the . 鈥淣ow is the time to ease up. If the Fed neutralizes the stance of monetary policy quickly and completely, it may yet avoid a recession. If it delays, as Federal Open Market Committee members project, we may not be so lucky.鈥
The Personal Consumption Expenditures Price Index (PCEPI), the Fed鈥檚 preferred measure of inflation, grew at a continuously compounding annual rate of 2.2% over the last year. However, it has slowed considerably in the past few months. PCEPI inflation has averaged 1.9% over the last six months and 1.4% over the last three months. In August, it was just 1.1%.
Core inflation, which excludes volatile food and energy prices and is therefore thought to be a better predictor of future inflation, has also declined. Core PCEPI grew at a continuously compounding annual rate of 1.6% in August. It has averaged 2.4% over the last six months and 2% over the last three months.
Over the last year, Fed officials have been looking for evidence that inflation is moving sustainably toward the 2% target. According to Luther, the latest data show inflation has聽already returned to 2%.
鈥淚f anything, inflation appears to be somewhat聽below聽target today,鈥 Luther said. 鈥淎lthough the Fed has successfully reduced inflation over the last two years, it seems reluctant to declare victory.鈥
Monetary policy is still tight today and is projected to remain tight through 2025. More cuts are projected for 2025, but not enough to return the stance of monetary policy to neutral, Luther said.
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