Inflation rates have dropped to 3% according to the Consumer Price Index (CPI) report, but as the Fed continues to stall a rate cut decision, it runs the risk of recession rather than a soft-landing for the US economy.
WASHINGTON, DC – MAY 03: Federal Reserve Board Chairman Jerome Powell delivers remarks at a news conference following a Federal Open Market Committee meeting on May 3, 2023, in Washington, DC. The Federal Reserve announced a 0.25 percentage point interest rate increase bringing the key federal funds rate to more than 5%, a 16-year high. (Photo by Anna Moneymaker/Getty Images)
By Maliyah Simone, CRDN
Tuesday, August 27, 2024
The Federal Reserve’s choice not to change or cut interest rates has raised some concerns about the potential effect this decision could have on a soft-landing economic outcome. The Fed is tasked with the delicate act of balancing inflation without stifling growth; however, finance professionals worry that stalling rate cuts may actually slow the economy down. A slow economy may bring some relief for homeowners and borrowers worried about high interest rates, but at what cost?
In July, the Bureau of Labor Statistics (BLS) reported in the Consumer Price Index (CPI) report that inflation had reached just 3%, indicating that rates were trending downwards. This is good news for the balanced interests. However, J. Powel and the central bank have set the inflation goal at 2%, which still leaves room for improvement. According to the Series of Economic Projections (SEP), released June 12th of this year, the Federal Open Market Committee (FOMC) projects that a rate cut is coming and expects it by the end of the year.
Financial experts hint that a rate cut could swing the balance either way; they claim that in choosing to maintain interest rates at their current level, the Fed risks allowing inflation to resume an upward climb. The central bank may need to resort to more aggressive rate hikes in the future, which could increase the chances of a hard landing, where the economy slows, and the risk of higher unemployment rates rises.
A soft-landing, the economic scenario where inflation gradually decreases without causing a recession, is the preferred outcome for policymakers. It avoids the pain of job loss, and the economic decline associated with a recession. However, high inflation in combination with a more resilient job market also has the potential to create a complex situation for the Fed.
The Fed’s main role is managing the federal fund rate. However, that is an inherently complex role in the marketplace. For instance, the federal fund rate, the interest rate at which banks lend their excess reserves to one another overnight is naturally impacted by the Fed’s centralized role. By adjusting the fund rate, the Fed influences the cost of borrowing within the economy; mortgages, car loans, credit cards, etc. To stimulate growth, the Fed can lower the federal funds rate, encouraging consumer behaviors in favor of borrowing and spending. However, to curb inflation, the Fed utilizes its central role to raise rates, making borrowing more expensive, and, thereby, slowing down economic activity.
While the Fed’s decision reflects optimism about the economy’s underlying strength, it is crucial to remain cautious. A rate cut in the near future could determine the climate of the US economy over the next few years. Though the path forward is uncertain, the Fed must closely monitor indicators and projections to determine if adjustments to rate policies are necessary to achieve economic balance.