Keep the Rate Hikes Coming

The Federal Reserve will decide at the end of October whether to raise interest rates for a second consecutive meeting, most likely by another quarter percentage point, from 4 percent to 4.25 percent.

If it doesn’t hike rates again this month, the Fed is almost certain to do so in December. If central bankers are truly committed to restoring price stability, why not skip the waiting and increase rates twice before year’s end?

All the rationale for higher interest rates from September’s decision remains: The labor market is doing just fine, the economy is growing but inflation is still too high, and it won’t fall back below target without tighter monetary policy. Putting off rate hikes would only delay what’s necessary and would keep inflation elevated for longer.

The financial press is saying the Fed got some “breathing space” from softer-than-expected inflation data yesterday. In August, the Personal Consumption Expenditures price index rose by 0.3 percent, and the “core” index (excluding food and energy costs) was up by 0.2 percent. From a year ago, those indices have risen by only 3.4 percent and 3 percent, respectively.

But those are exactly the same year-over-year rates recorded for July (now revised downward), and higher than they were last year, so inflation is not exactly receding. Monthly inflation when annualized now sits at 3.7 percent for headline PCE and 2.4 percent for core. The stated target, remember, is 2 percent. So inflation is still too high by any metric, but the Fed ought to ease up because it’s not quite as too-high as markets anticipated?

We are in no immediate danger of inflation falling too low. The Fed already knows what it has to do: raise interest rates until the pace of money creation, and thus of general price rises, is slowed sustainably. It has begun the process of fulfilling its mandate, and the Fed’s credibility rests on following through. Wavering or delaying this month would do neither the central bank nor Americans any favors.