On Wednesday, the Federal Reserve announced it will leave interest rates unchanged at around 5.3%, their highest level since 2001. Federal Reserve Chair Jerome Powell suggested one or two rate cuts could come. before the end of the year, but almost certainly not until fall. However, Wednesday’s decision to maintain current rates was a mistake: the Federal Reserve should already be cutting rates. And every month he refuses to do so is a gift to Donald Trump.
Voters’ economic concerns have long been among the biggest obstacles to President Joe Biden’s re-election. Some of this discontent is rooted in partisanship: Republicans almost completely changed their views on the economy the moment Biden took office. Part of this goes back to the disruptions of the pandemic. But there’s no denying that a 20% rise in prices since Biden took office has played into those frustrations, even as wages have outpaced prices over the past two years.
The Federal Reserve says it will maintain current interest rates to combat inflation. It might seem like that’s good for Biden. But that is not the case.
To be clear, the Fed theory has nothing to do with politics. (Trump has already promised that he will not reappoint Powell as president.) Earlier Wednesday, the Consumer Price Index report put year-over-year inflation at 3.3%, slightly below expectations and well below its peak of 9.1% in June 2022, but still above from where the Federal Reserve would like. Combine that news with Friday’s jobs report, which showed job and wage growth accelerated in May, and it seems obvious why Powell and company fear reversing course.
But a look beneath those headline figures shows that this cautious reading is a mistake. May’s employment numbers may have beaten expectations, but other data is less encouraging. GDP growth in the first quarter was only 1.3% annually. The unemployment rate hit 4% for the first time in more than two years, and other metrics also show a weakening labor market.
Additionally, Wednesday’s inflation figure may be misleading. On a monthly basis, prices were stable for the first time in two years. Grocery prices also remained stable and gasoline prices fell. Even auto insurance, which rose 20% over the past year, eventually fell. The most important factor in persistent inflation rates – housing – uses a metric that lags behind private sector measures by months; These latest measures have shown that house prices have decreased more recently.
In the tug-of-war between fighting inflation and avoiding recession, other central bankers are starting to lean toward the latter. The notoriously inflation-averse European Central Bank, as well as central banks in Canada, Switzerland and other countries, have cut rates. Yet the Federal Reserve persists.
The problem is that, by design, higher interest rates are not without their victims. The goal is to slow economic growth by causing consumers to reduce spending. But high rates raise the cost of mortgages, credit cards and auto loans. These higher interest expenses are not reflected in the CPI, but they are absolutely on the minds of Americans when they complain about the rising cost of living.
This burden is also not distributed equally. Just as rising prices disproportionately hurt poorer Americans, who spend more of their money on food and energy, higher interest rates are a bigger burden on those who can’t pay their credit card bills. every month or those looking to leave an initial country. home.
The Fed’s delay is particularly frustrating because interest rates are a clumsy tool to combat this onslaught of inflation. Higher rates may be helpful when inflation is primarily a problem of too much consumer demand. But recent inflation has been driven much more by bottlenecks in supply chains, other pandemic disruptions and corporations seeking higher profits. (A Groundwork Collective study found that “corporate profits drove 53 percent of inflation” in the mid-six months of 2023.) Higher interest rates can still reduce inflation, but only indirectly. And in the crucial real estate sector, higher rates make homeowners more reluctant to take out a new mortgage to move, further driving up prices amid the country’s broader housing shortage.
As Peter Coy of the New York Times said: “The blunt tool of high rates is coming down on the heads of the working class.” Pandemic-era savings have dried up and Americans are cutting back, as evidenced by giant corporations like McDonald’s and Walmart slashing prices to attract customers.
The last time Trump was in the White House, he often attempted to undermine the long-standing independence of the White House Federal Reserve. That independence exists for a reason: to give credibility to the central bank’s economic objectives. It’s ironic, then, that the Federal Reserve’s misguided interest rate policy is needlessly putting the economy at risk, raising the cost of living and shoring up a key voter concern that may help bring Trump back.
This article was originally published on MSNBC.com
