The Wall Street Journal headline makes a prediction, and the subheadline adds to it:
Market Selloff Upends Fed Rate-Cut Calculus
A further slowdown in the labor market could lead to a larger half-point rate cut next month
It needn’t, though, and if Federal Reserve Chairman Jerome Powell and his Board of Governors make such a move, they’ll be ignoring history.
Inflation is right next door to the Fed’s goal of 2%\yr; the delta between today’s inflation and that target is in the region of noise around the signal.
The stock market is down a bit, even if sharply: for all the steepness of the drop over the last few days, it’s still only down 6-ish percent, not even a correction level. The market also is irrelevant.
Historically—and history did not begin with the dot com bubble burst—Fed benchmark interest rates that have been consistent with 2% inflation have been in the 5% region. That’s where the Fed is now, and that’s where our economy’s inflation is now.
But wait—unemployment has risen to 4.3%. I say, so what. That level, and the increase over the prior month and especially the past year, plus, certainly bear watching. However, the increase is off historic lows for unemployment, and the present level remains consistent with full employment, which is another of the Fed’s statutory goals.
It’s time for the Fed—for Powell and his BoG members—to say so on both matters, and to say they’re now going to sit down, be quiet, and let market forces—this time, meaning private economy forces—do their trick unfettered by artificially, and arbitrarily, set government-managed interest rates. Who wins then? Our private economy, with both stable pricing and stable business cost of money—interest rates.
Other major winners would include the stereotypical widows and orphans, and old folks, and anyone else who depends in significant part on fixed income, which is to say interest-driven, instruments.
I repeat myself, but this bears repeating.
