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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.
