The US Fed is under watch for more than just its policy rate
Subscribe to enjoy similar stories. The odds-on bet across financial markets globally is on a rate cut this week by the US Federal Reserve, now that inflation there looks closer to its 2% target and weak job growth is in focus. A rate reduction would mark a reversal of the central bank’s hiking spree that elevated America’s policy rate from 0-0.25% in early 2022 to 5.25-5% by mid-2023 to quell an outbreak of inflation it mistook as transitory.
It was not as drastic as the Fed’s rate spike of the early 1980s, but has again shown the power of costly credit against price flare-ups. If the US suffers only a slowdown in the wake of tight money (a ‘soft landing’), the Fed would’ve staged a fine recovery from its pandemic stumble. Note that price instability had been fading as a scare in the US after the Cold War ended, thanks to globalization’s gift of cheap imports, IT-aided cost efficiency and other factors.
The Fed had seen the US economy expand faster without an overtight labour market and payroll-pushed inflation. However, by the time covid disrupted supply chains, froze activity and pushed the Fed into ultra-loose money mode, at least one of those price deflators had weakened. With the outlook so dicey, holding prices steady was no easy task, surely.
It took 30 months, but to the Fed’s credit, the job is mostly done. It is time, then, for the Fed to focus on job generation, the other part of its dual mandate. While this may mark a return to its rate policy as usual, with money being squeezed and eased gently to smoothen boom-and-bust cycles, it is also a good moment to ask if other risks lurk.
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