Does the Fed even know what it’s trying to do?

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Subscribe to enjoy similar stories. We might as well confront it head-on: What the Federal Reserve did this week doesn’t make any sense. The Federal Open Market Committee on Wednesday cut the target range for the Fed funds rate by one-quarter percentage point, to 4.25% to 4.5%, its third consecutive rate reduction.

Because the first, in September, was a “jumbo" half-percent cut, the central bank’s policy rate now has fallen a full percentage point from its post-pandemic peak. This is remarkably dovish. Inflation remains well above the Fed’s 2% target.

Also on Wednesday, central-bank officials conceded in their quarterly economic projections that inflation this year has been more stubborn than they had foreseen as recently as September. Cutting rates despite all this is an even bigger head-scratcher than it first appears. Cast your memory back to December 2023, and another FOMC meeting and set of quarterly projections.

Back then, Fed officials floated the possibility of rate cuts totaling three-quarters of a percentage point for this year, while assuming headline and core inflation (measured by the Fed’s preferred personal-consumption-expenditure index) both would be 2.4% by now and would be on track to reach 2% by 2026. Chairman Jerome Powell was lauded in many quarters (including this column) for ditching those projected rate cuts in the spring after several months of data suggested inflation was lingering. We all spoke too soon.

Since September, the Fed has cut rates further even than its December 2023 plan. This as core inflation exceeds the central bank’s prediction a year ago for where we’d be by now and as officials now think inflation won’t be whipped until 2027 instead of 2026. To resolve this incongruence, the