How the Federal Reserve is making a huge mistake

The consensus among economists is that this morning’s jobs report, which shows the United States added a whopping 272,000 jobs in May, will cause the Federal Reserve to leave interest rates unchanged at their current high level when meet next week.

Federal Reserve officials still fear the specter of inflation. Average hourly earnings increased 0.4 percent in May from April and 4.1 percent from a year earlier.

But it would be a mistake for the Federal Reserve to postpone lowering interest rates. Five reasons:

  1. The May unemployment rate rose to 4 percent for the first time since January 2022. The household survey (which is more indicative of the state of the economy than the business survey) paints a picture of an economy that could still fall into recession.
  2. Consumer spending (especially low-income consumers) is slowing.
  3. Wage growth has not been a major cause of inflation in recent years. A major cause has been the monopoly power of companies to raise prices and keep them high. This has been particularly true in the food and energy sectors. High interest rates will not reduce this monopoly power.
  4. The job trend is not as strong as some might think. For example, employment reports for March and April were revised downward by 15,000 jobs in total.
  5. Finally, high interest rates are hurting Americans with auto loans, student loans, credit card debt, and mortgage debt. Many of these Americans have exhausted their post-pandemic savings. Most are low income. It is unfair to impose the burden of continuing to fight inflation on them.