Challenges to Lower Inflation without a Significant Economic Slowdown Continue
The Federal Reserve’s previous plan to begin the process of lowering interest rates as soon as the middle of 2024 if inflation continued the downward path of the second half of 2023, when it had “cooled notably” turned out to be “built on a rickety foundation” when inflation rose in the first quarter of 2024 and the economy showed solid growth. New efforts to strike a balance between “ensuring inflation comes back to the Fed’s 2% goal, while preventing a sharp rise in layoffs has led to the observation by Federal Reserve Chair Jerome Powell that “the labor market was ‘not a source of broad inflationary pressures for the economy.’” Instead, Powell now believes that “inflation had been caused by the collision between very strong demand and supply chains that were already messed up by the pandemic.” Fed officials continue to monitor what is a very fine line between the risk of “moving too slowly to reduce rates with the risk of moving too soon.” On the one hand, if rates are lowered to soon, it “could allow inflation to settle out above the Fed’s target,” but a considerable softening of the labor market that has recently been observed must be watched since layoffs tend to rise rapidly as the economy weakens, which argues against keeping interest rates too high.