Cooler Inflation Tells Fed That Rates Are High Enough
The economy is growing, unemployment is low, demand is moderating and inflation — though still too high — is slowly coming under control.
Phew.
Photographer: Samuel Corum/Bloomberg
As the Federal Reserve struggles to make sense of a ceaseless flow of noisy statistics, it needs to keep one question front of mind: Is the current policy rate restrictive enough to bring inflation gently back down to the central bank’s 2% target? Right now, taken as a whole, the evidence says yes.
Financial markets have been wondering. Prices and wages rose faster than expected in the first quarter, suggesting that inflation might flatten out at higher than 3%. If that turned out to be true, it would reveal that the current policy rate of 5.25% to 5.5% (a 23-year high) is too low and that the next change in interest rates would need to be upward. Asked about this at an event on Tuesday, Fed Chair Jerome Powell wouldn’t rule out the need for higher rates, but he urged patience. “It looks like it will take longer for us to become confident that inflation is coming down to 2% over time,” he said.