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OPINION: Inflation is still high as Fed weighs interest-rate cuts

By Robert Romano

Date:

Consumer inflation ticked up 0.4 percent in February to an annual rate of 3.2 percent amid a jump in oil, gasoline, natural gas, transportation, and shelter, according to the latest data by the Bureau of Labor Statistics.

Gasoline was up 3.8 percent. Fuel oil rose 1.1 percent. Natural gas was up 2.3 percent. Used cars and trucks ticked up 0.5 percent. Apparel was up 0.6 percent. Shelter edged up 0.4 percent. And transportation services increased 1.4 percent.

Although the rate of inflation has indeed slowed down from its 9.1 percent annual peak in June 2022 to its current rate of 3.2 percent, since January 2021 when President Joe Biden took office, overall consumer prices are up almost 18.5 percent.

For comparison, from January 2017 through February 2020, prior to COVID, at that point consumer prices had increased 6.4 percent.

Meaning, what has already been experienced — and is still being felt — is triple what the American people were accustomed to prior to COVID and its resulting $7 trillion printing, borrowing, and spending binge by the Federal Reserve and Congress.

In the meantime, the Fed has been holding rates firm at 5.25 percent to 5.5 percent. But in its economic projections released in December 2023, the central bank appears to be anticipating rate cuts to begin sometime this year — which is usually what happens when the economic cycle is ending and unemployment begins to rise — projecting the Federal Funds Rate to drop to 4.6 percent in 2024.

But that might change with the latest reading from the Bureau of Labor Statistics. On March 6, Federal Reserve Chairman Jerome Powell told Congress that the central bank wants to be certain inflation is headed back to its “normal” 2 percent a year bearing. He said, “In considering any adjustments to the target range for the policy rate, we will carefully assess the incoming data, the evolving outlook, and the balance of risks… The Committee does not expect that it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.”

This could indicate the Fed wants to get inflation down as far as possible before making any moves, and although the unemployment rate is off its historic low of 3.4 percent in April 2023 to its current rate of 3.9 percent in February, the Board of Governors is not panicking. As unemployment moves up, that is usually when the Fed will begin cutting rates as the cycle ends.

The fear could be that once the economic slowdown or recession is realized, unemployment will temporarily jump up, the Fed will cut rates and then robust inflation could be restored very quickly. For years, Biden has rejected there being any necessary tradeoffs between inflation and unemployment, but as the Fed keeps rates higher than the rate of consumer inflation and 898,000 jobs have been lost out of the household survey since November 2023 that hypothesis will soon be tested.        


Robert Romano is the VP of public policy at Americans for Limited Government Foundation, the research arm of Americans for Limited Government, a libertarian political advocacy group. The organization conducts policy research and publishes reports with the goal of reducing the size of the government.

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