Bre­it­bart Busi­ness Digest: The Fed Should Take a Long Win­ter’s Nap

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<div>Breitbart Business Digest: The Fed Should Take a Long Winter's Nap</div>

The Fed Slouch­es Toward Anoth­er Errant Cut

Fed­er­al Reserve offi­cials appear poised to repeat the mis­take of Sep­tem­ber and Novem­ber by cut­ting inter­est rates again when the eco­nom­ic data clear­ly calls for a pause.

Fed Gov­er­nor Christo­pher Waller, speak­ing in Wash­ing­ton, expressed a ten­ta­tive incli­na­tion to cut rates at the Decem­ber meet­ing of the Fed­er­al Open Mar­ket Com­mit­tee (FOMC), cit­ing data that could show infla­tion eas­ing.

“At present I lean toward sup­port­ing a cut to the pol­i­cy rate at our Decem­ber meet­ing,” Waller said. “But that deci­sion will depend on whether data that we will receive before then sur­pris­es to the upside and alters my fore­cast for the path of infla­tion.”

New York Fed Pres­i­dent John Williams and Atlanta Fed Pres­i­dent Raphael Bostic offered sim­i­lar­ly cau­tious endorse­ments of future cuts.

This cho­rus of dovish sen­ti­ment would be under­stand­able if the econ­o­my were in a tail­spin, but it’s not. Gross domes­tic prod­uct expand­ed at a robust 2.8 per­cent annu­al­ized rate last quar­ter. The Fed­er­al Reserve Bank of Atlanta’s GDP­Now met­ric has the econ­o­my expand­ing at a 3.2 per­cent rate in the fourth quar­ter.

Fed­er­al Reserve Gov­er­nor Christo­pher Waller speaks at the Peter­son Insti­tute for Inter­na­tion­al Eco­nom­ics in Wash­ing­ton, DC, on May 21, 2024. (Fed­er­al Reserve via Flickr)

On Tues­day, the Depart­ment of Labor’s Job Open­ings and Labor Turnover Sur­vey (JOLTS) showed that employ­ers were look­ing to hire work­ers into 7.744 mil­lion posi­tions at the end of Octo­ber. That rep­re­sents a sig­nif­i­cant rise from Sep­tem­ber and beat the fore­casts of even the most bull­ish econ­o­mists. Job­less claims have been falling for three weeks and remain very low. Quits are increas­ing, show­ing work­er con­fi­dence in the health of the labor mar­ket.

Per­son­al spend­ing remains strong, bol­stered by a resilient labor mar­ket. Retail sales rose 0.4 per­cent from Sep­tem­ber to Octo­ber. While brick-and-mor­tar Black Fri­day sales may have dis­ap­point­ed, this is like­ly due to strength in online pur­chas­es and hol­i­day shop­ping habits shift­ing to ear­li­er in the sea­son.

The Thanks­giv­ing trav­el peri­od has hand­ed us an eye-catch­ing data point—one that serves as a barom­e­ter for con­sumer con­fi­dence and the broad­er econ­o­my. Accord­ing to the TSA, U.S. air­ports han­dled a record 3.09 mil­lion trav­el­ers on Sun­day, Decem­ber 1, the busiest day ever record­ed in the agency’s data. For the 10-day stretch from the Fri­day before Thanks­giv­ing to the Sun­day after, air trav­el vol­umes were 3.6 per­cent high­er than last year and 9.3 per­cent above pre-pan­dem­ic lev­els in 2019.

Con­struc­tion spend­ing last month surged 0.4 per­cent, twice as much as expect­ed, and is up 5.0 per­cent from a year ago. And while the Insti­tute for Sup­ply Management’s man­u­fac­tur­ing index is still sig­nal­ing con­trac­tion, it improved in Novem­ber and beat expec­ta­tions.

Yet here we are, with pol­i­cy­mak­ers sig­nal­ing their readi­ness to trim rates fur­ther, despite three rate cuts since Sep­tem­ber and an already over­stim­u­lat­ed econ­o­my. This is a mis­take, one root­ed in a mis­read­ing of both the infla­tion out­look and the labor mar­ket.

Infla­tion Is Not “Fixed”

Waller right­ly not­ed that core infla­tion remains “sticky,” par­tic­u­lar­ly in ser­vices. The per­son­al con­sump­tion expen­di­tures (PCE) price index—excluding food and energy—rose 2.8 per­cent in the 12 months end­ing in Octo­ber. While this marks progress from the highs of 2022, it is far from the Fed’s two per­cent tar­get. As SMBC Nikko Secu­ri­ties chief econ­o­mist Joe Lavorgna points out in a recent client note, the three, six, and 12-month rates of change on the core PCE price index are either no longer improv­ing or are actu­al­ly accel­er­at­ing.

More trou­bling is the com­pla­cen­cy among Fed offi­cials. Waller claimed there is “no indi­ca­tion” prices in key ser­vice cat­e­gories will stay ele­vat­ed, but his­to­ry offers lit­tle com­fort. Infla­tion is a process, not a moment, and let­ting off the brakes pre­ma­ture­ly risks reignit­ing price pres­sures.

The Labor Market’s Decep­tive Bal­ance

Fed offi­cials also appear to be too neg­a­tive about the labor mar­ket. Waller sug­gest­ed the job mar­ket is “in bal­ance,” while oth­ers point to signs of wage mod­er­a­tion. But these sig­nals are far from defin­i­tive. Strikes, storms, and oth­er tem­po­rary dis­rup­tions have mud­died the data, mak­ing it per­ilous to draw sweep­ing con­clu­sions.

More­over, a labor mar­ket “in bal­ance” doesn’t mean the Fed should ease pol­i­cy. On the con­trary, it’s pre­cise­ly this kind of equi­lib­ri­um that allows mon­e­tary restraint to work its way through the econ­o­my with­out caus­ing sig­nif­i­cant harm. Cut­ting rates now would risk undo­ing the hard-fought progress on infla­tion while send­ing a con­fus­ing mes­sage about the Fed’s com­mit­ment to its man­date.

The Fed Should Hold the Line

There is an old say­ing: When you’re in a hole, stop dig­ging. The Fed dug its infla­tion hole by being too slow to tight­en pol­i­cy in 2021 and too eager to embrace flawed frame­works like aver­age infla­tion tar­get­ing. Now, as it begins to climb out, it risks slid­ing back in by cut­ting rates too soon.

Offi­cials should heed the lessons of the past. Mon­e­tary pol­i­cy oper­ates with a lag, mean­ing the full effects of this year’s rate hikes have yet to be felt. Cut­ting rates now would be akin to declar­ing vic­to­ry in a bat­tle still rag­ing.

Chair­man Jerome Pow­ell and his col­leagues should take a step back and reassess. The econ­o­my is grow­ing, infla­tion remains above tar­get, and the labor mar­ket is far from frag­ile. These are not con­di­tions that call for eas­ing mon­e­tary pol­i­cy. They are con­di­tions that demand patience and dis­ci­pline.

The Fed’s next meet­ing is a chance to show the resolve that has been miss­ing in recent months. By hold­ing rates steady, offi­cials can rein­force their cred­i­bil­i­ty, main­tain progress on infla­tion, and avoid a cost­ly pol­i­cy error. The choice is clear—if only they have the courage to make it.