Last week’s decision by the Federal Reserve to pause on interest rates left many unanswered questions, despite reporters raising them during the Q & A session. While the average person may be skeptical that the Fed can control inflation by simply raising interest rates, it’s still a position the Fed holds onto dearly.
The problem is that Chair Powell cannot reconcile the discrepancy between (price) inflation readings surpassing the 2% target and the decision to halt rate increases to “fight inflation.”
Using their own data, he confirmed:
In May, the 12-month change in the Consumer Price Index came in at 4.0 percent, and the change in the core CPI was 5.3 percent … Nonetheless, inflation pressures continue to run high and the process of getting inflation back down to 2 percent has a long way to go.
And eventually, he went on to say:
Inflation has not really moved down. It has it is not so far reacted much to our to our existing rate hikes. And so we’re going have to keep at it.
Much can be said about the futility of doing the same thing over and over again and expecting different results. In the Fed’s case, it’s the hope that the rate hikes which began last year will somehow work this year and beyond.
The Fed’s decision to pause rates triggered a wave of reasonable inquiries, such as:
I’m curious what gives you and the Committee the confidence that waiting will not be counterproductive at a time when the monthly pace of core inflation is still so elevated?
Followed by another reporter who asked:
… what’s the value in pausing and signaling future hikes versus just hiking? … So why not just rip off the Band-Aid and raise rates today?
The Chair’s responses to these questions lacked clarity. On one occasion, he said the focus was on “determining the extent of additional policy firming,” while at other times, it became a matter of speed, saying “it’s common sense to go a little slower” in the current circumstances.
Nonetheless, where he struggled to articulate the process, he excelled in explaining the outcome, showing strong conviction, and providing assurances that everything will turn out fine. In his own words:
But we have to get inflation out of 2 percent, and we will.
Reiterating to the world:
… we’re committed to getting inflation down. And that’s the number one thing.
As far as policy is concerned:
At the same time, our main focus has to be on getting the policy right. And that’s, that’s what we’re doing here and that’s what we’ll do for the upcoming meetings.
Powell’s tough sell came to an end, marked by the customary evasion of the real issues and the promise of further data review and deliberations. All of this is aimed at reassuring us everything will be fine because the appropriate policy will be implemented. However, the details of how this works remain unclear, placing significant reliance on both public trust and ignorance.
While the Fed maintains that the current stance is a temporary pause, followed by rate hikes, it is worth remembering that neither a pause nor a hike will carry much weight once rate cuts make a comeback in the not-too-distant future.
