The Federal Open Market Committee wrapped up its rate-setting meeting today leaving rates unchanged and warning that the economy is not totally out of the woods on inflation. The FOMC did not recant the signals it sent late last year indicating that 2024 is likely to see three rounds of rate cuts. That had led some commentators to hope that the first cut could come as early as the Fed’s March meeting. But it now appears that the Fed will wait longer to observe economic trends and postpone those cuts to later in 2024.

The FOMC’s statement, released at 2 p.m. today, cautioned that "the Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent." At his press briefing, Chairman Jay Powell added, "We will need to see continuing evidence" of declining inflation before cutting rates. Stock markets quickly fell, reflecting concerns that we will have to wait longer for rate cuts.

The Fed’s policy of high interest rates, which have already persisted longer than necessary, has itself become a source of inflation, raising costs of home mortgages and business loans, and making productive investment more expensive. To the extent that the pandemic bout of inflation was almost entirely the result of supply shocks, we need to redouble efforts to rebuild domestic capacity. High interest rates retard that process.

Higher interest rates also increase the cost of financing the national debt. Deficit hawks have been making a huge issue of the rising debt, claiming that it will have to spike inflation. But financial markets aren’t buying it. The 30-year Treasury bond is trading at under 4.3 percent. Nobody in their right mind would lend the government money for 30 years at such a low rate if they expected long-term inflation to be much over 2 percent, yet the Treasury has plenty of buyers.

Because the inflation of 2021 and 2022, which subsided by late 2023, was supply-driven, it would have come down without the Fed’s policy of needlessly tight money. The economy is now very strong, with core inflation below the Fed’s own 2 percent target at 1.7 percent, and the best job creation record in half a century.

The Fed has waited too long to take its foot off the brake, but better late than never. If Fed Chair Powell wants to believe that the combination of low inflation and strong economic growth is to his credit, let him indulge that fantasy—as long as it is prologue to the promised rate cuts later this year.

Financial markets have already "priced in" the expectation of rate cuts. Until today’s cautionary announcement, stock markets have been soaring.

Now the financial boom needs to be better shared with regular working Americans.
Monetary policy and tight labor markets can do only so much on that front. In addition to more benign Fed policy, what’s needed is better wage regulation and above all stronger unions.