The Unsustainability of the Fed’s Monetary Policy Contradictions

Federal Reserve Chair Jerome Powell recently indicated that the strong economy, low unemployment, robust consumer spending, and increased business investment provide the Fed the room to gradually reduce interest rates.

In a speech delivered Dallas, Powell remarked, “The economy is not sending any signals that we need to be in a hurry to lower rates”. He noted that “the strength we are currently seeing in the economy gives us the ability to approach our decisions carefully”.

According to The New York Times, the Fed is currently going through a complex economic environment. While the economy remains generally healthy, the job market has cooled in the past year, and inflation has been steadily decreasing. These developments have led Fed officials to conclude that the need for aggressive economic intervention has lessened.

However, Fed officials are said to have the inflation fully suppressed in mind. Prices have cooled significantly from their peak in 2022, but have not yet fully returned to its 2% target. According to other recent data reports, in the year ending September, prices rose by 2.1%, with prices for October expected to be slightly higher than this level.

Therefore, based on the prevailing perspectives of the media and most American economists, Powell’s repeated stance on monetary policy, specifically the decision to refrain from rate cuts, has its reason.

That being said, while Powell has consistently emphasized the need to maintain a “no rate cuts” stance, seemingly to assert the Fed’s independence and resist external pressures, particularly from the Trump administration, the problem lies in its internal conflict. The Fed’s rationale for maintaining high interest rates is rooted in its focus on controlling inflation. Powell has reiterated that the Fed’s policy objectives remain unchanged, with a steadfast commitment to curbing inflation. The paradox lies in the fact that keeping interest rates elevated is, in effect, counterproductive to reducing inflation. High interest rates do not ease inflationary pressures. Rather, they tend to solidify the current inflationary levels. This internal contradiction is a challenge that the Fed, under Powell’s leadership, cannot overlook.

Given the current situation, the inherent contradictions in the Fed’s monetary policy suggest that Powell may ultimately face external pressures, including from the Trump administration, which could force the Fed to lower interest rates in the near future.

Written by Chan Kung.
Have you read?
World’s Best International High Schools.
Best Hospitality And Hotel Management Schools In The World.
World’s Most Powerful Passports.
Richest Countries In The World.