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The Fed Should Wait and See

With recent data showing that both inflation and inflation expectations have eased, it would be irresponsible for the US Federal Reserve to create much higher unemployment. Amid so much uncertainty, it should instead pause interest-rate hikes until a more reliable assessment of macroeconomic conditions is possible.

NEW YORK – The US Federal Reserve Board will meet again on September 20-21, and while most analysts anticipate another big interest-rate hike, there is a strong argument for the Fed to take a break from its aggressive monetary-policy tightening. While its rate hikes so far have slowed the economy – most obviously the housing sector – their impact on inflation is far less certain.

Monetary policy typically affects economic performance with long and variable lags, especially in times of upheaval. Given the depth of geopolitical, financial, and economic uncertainty – not least about the future course of inflation – the Fed would be wise to pause its rate hikes and wait until a more reliable assessment of the situation is possible.

There are several reasons to hold off. The first is simply that inflation has slowed sharply. Consumer price index (CPI) inflation – the measure most relevant to households – was zero in July, and it is likely to have been zero or even negative in August. Similarly, the personal consumption expenditure (PCE) deflator – another often-used measure based on GDP accounts – fell by 0.1% in July.