The Federal Reserve voted today to cut its benchmark interest rate by a quarter of a percentage point for the third consecutive meeting. Rates will decline from the apparently too-high level of 3.75–4 percent to a slightly milder 3.5–3.75 percent.
As Louis-Antoine would say, “It’s worse than a crime; it’s a mistake.”
A couple of officials on the Fed’s Board of Governors recognized the mistake, correctly fearing that the Fed had effectively given up on taming inflation, to prop up the ailing job market instead. The Wall Street Journal reports:
The Fed voted 9-3 for the reduction on Wednesday, the first time in six years that three officials cast dissents. Chicago Fed President Austan Goolsbee and Kansas City Fed President Jeff Schmid thought the reduction wasn’t warranted, while Fed governor Stephen Miran favored a larger, half-point cut.
The decision to reduce the benchmark federal-funds rate by a quarter point—to between 3.5% and 3.75%, a three-year low—is aimed at protecting against a sharper-than-anticipated slowdown in hiring.
With progress on inflation stalled, officials had indicated in the run-up to this week’s decision that further reductions could require evidence of labor-market deterioration.
Of course, the Fed said it was done lowering interest rates last year, after multiple consecutive cuts, but then it started cutting rates again this year. None of those rate cuts were justified — not when annual inflation remains stuck at 3 percent, 50 percent higher than what the Fed says it wants inflation to be.
Its actions say otherwise. If the Federal Reserve’s principal mission is sound money, it has abdicated. Tightening monetary policy through higher interest rates is the only way to quash persistent inflation, but the Fed is loosening monetary policy instead. We should expect 3 percent inflation to continue because absolutely nothing is being done to stop it.
Popular misconceptions about current monetary policy abound. No, interest rates are not high by any reasonable standard; they are well below the historical average. They only feel high because, as a result of the Fed’s policies, Americans have become acclimated to ultralow interest rates over the past two decades. No, low interest rates cannot somehow boost the supply of goods enough to meet demand. Cheap credit does not make the overall economy more productive; it merely distorts investment and stimulates borrowing, driving up the prices of existing assets.
There is one way and one way only to bring inflation down: reduce the growth of the money supply. The only way to do that is for the Fed to tighten credit by raising interest rates. That is what it had to do in the early 1980s to beat inflation, and that is what it needs to do now.
The current policy of surrendering to inflation — which President Trump has not only cheered but demanded — will cost the president dearly. That he’s too ignorant to understand this will not save him.