The Federal Reserve is handily doing the tightrope walk mireconomy. Recent news suggests they need to pursue a more nuanced, state-by-state approach to interest rates. In June, the Consumer Price Index (CPI) showed just how quickly these tariffs are increasing costs and fueling inflationary fears. While discussions around potential rate cuts have gained traction, officials emphasize that no specific month, such as July or September, holds paramount importance in determining future actions.
The recent CPI release is further proof that tariffs are having a huge impact on the course of inflation. This illustrates how interconnected our trade policies are with consumer prices and the difficult position that policymakers find themselves in. The Federal Reserve has, understandably, kept a wait-and-see approach as it looks at a variety of domestic and global economic indicators.
In this context, rate cuts are coming into sharper focus. Signs of resilience are beginning to emerge from the economy, even with sustained restrictive actions embedded. My view has always been that the Federal Reserve has raised rates high enough already and has left them high for too long. The bad news is that the economy is so strong that a severe recession isn’t necessary to finally reduce inflation. This means that it still has ample room to maneuver without alternating inflationary and stagflationary economic realities.
The American Action Forum, an economically conservative think tank, predicts that interest rates will return to 3% or more. This figure is above the neutral rate that existed prior to the pandemic. This dot plot further indicates that the Federal Reserve remains poised to respond to adverse economic developments. It is still very much focused on inflation-fighting. A 3% or above rate would represent an important pivot in the Fed’s monetary policy. This decision is intended to support continued economic expansion and to curb inflationary pressures.
Some might call it wishful thinking, but many analysts are banking on at least two rate cuts this year. As damaging as the cuts may be, timing of cuts does matter. The central bank’s decision-making process will take into account various factors, including inflation trends, employment levels, and overall economic health.
As debates over possible rate cuts ramp up, economists insist timing isn’t the focus. They contend that the timing of the cuts — July vs. September — matters less than what’s really going on behind the scenes. Their overall aim is to provide the conditions for long-term, sustainable economic prosperity.