Fed Slows Interest Rate Bump, Raises Rates by 0.5 Points
The recent decision by the Federal Reserve to approve a half-point interest rate hike is an anticlimactic development. The increase matched predictions, but it does little to address the real issue at hand: inflation is not going down by any meaningful degree for the average American.
The change in the interest rate is a shift for the central bank, coming after an unprecedented year of seven consecutive rate hikes. The latest rate hike pulls the Fed back from three consecutive 0.75% increases, signaling confidence that the central bank believes it can bring sky-high inflation down to normal levels.
Sure, the consumer price index went from 7.7% in October to 7.1% in November, but that isn’t comforting. Inflation remains at a level more than triple the Fed’s target rate of 2% and shows no significant signs of abating. Max Zahn of ABC notes, “Meanwhile, the personal savings rate fell to 2.3% last month, the lowest rate in nearly two decades, according to data from the Commerce Department. The failure to stash extra funds suggests that savings stockpiled during the pandemic have strained under the weight of high prices.”
The Fed’s projections show that the central bank will not dial back rate hikes until 2024, indicating that the inflation problem is far from being solved.
These hikes were part of an aggressive campaign to try and bring down the highest inflation since the early 1980s. However, despite these efforts, inflation remains a significant problem. The Fed’s own projections show that its favored price gauge, the personal consumption expenditures price index (PCE inflation), will remain above its 2% target until at least 2025.
As Randall Holcombe pointed out in November, the Fed is generally going in the correct direction in regard to interest rates, but it has been late to react. “Too little too late” shouldn’t be a macroeconomic strategy.