Inflation has been a significant concern in the past couple of years, with the Federal Reserve’s late response allowing consumer prices to skyrocket. However, some economists now argue that the Fed may be making another mistake by moving too slowly to cut interest rates, potentially triggering a recession.
Mark Zandi, chief economist of Moody’s Analytics, warns that waiting too long to cut rates could result in unexpected consequences. He believes that the Fed should start lowering rates in March or May at the latest, as inflation is already approaching the Fed’s 2% target. Inflation is currently running around 3%, down from a high of 9.1% in June 2022.
However, Fed Chair Jerome Powell has expressed doubt about a rate cut in March, and the minutes of the Fed’s January meeting suggest that the first rate decrease may not happen until June or later. Many economists support the Fed’s cautious approach, believing that inflation remains a bigger threat.
Barclays economist Marc Giannoni states that the Fed is right to be patient, particularly as inflation is still a concern. He points out that a core inflation measure, excluding volatile food and energy items, rose 0.4% in January, keeping the annual rise at 3.9%. Additionally, U.S. employers added 353,000 jobs in the same month, with average annual wage growth increasing to 4.5%.
Although the economy is currently strong, with a GDP growth rate of 3.3% in the last quarter of 2023, some economists argue that the risk of a recession is now greater than the chances of higher inflation. Zandi warns that keeping interest rates high for too long could lead to a banking crisis and increased layoffs. He believes that the Fed’s key rate should already be at 4% rather than 5.25% to 5.5%.
Giannoni agrees that the risks of another inflation surge versus a recession are becoming more balanced, but he still considers inflation to be the bigger concern. He points out that prices of services such as healthcare and dining out have continued to increase sharply, potentially leading to higher inflation.
Overall, economists are divided on whether the Fed should cut rates to combat inflation or maintain its cautious approach. The path to 2% inflation remains uncertain, and the risk of triggering a recession with high interest rates will need to be carefully monitored.
