Powell, Fed soothe worries, and seem to understand that jobs and paying bills >>>> CPI at 2% vs 3%

There was quite a bit of nervousness around Wall Street and everyday investors over what officials at the Federal Reserve might say today. Not that there was any expectation of a change in the central Fed Funds rate, but they wanted clues as to when (or if) the Fed might start cutting rates from their 23-year highs.

The worries got elevated after a couple of reports from last week showed inflation has had a bit of a pickup from the sub-2% rate that it was running at the end of 2023. So Fed Chair Jerome Powell and the rest of the Open Markets Committee released their statement, in which they said....

Federal Reserve officials maintained their outlook for three 25bps cuts this year but forecast fewer cuts than before in 2025 following uptick in inflation; decision was unanimous; fed funds rate remains in range of 5.25% to 5.5% (highest since 2001, for fifth straight meeting)

— Liz Ann Sonders (@LizAnnSonders) March 20, 2024

And the response to that statement and Powell's 2:30pm press conference reiterating that guidance was...

"The labor market's in good shape," Powell says.

— Brendan Pedersen 🏦 (@BrendanPedersen) March 20, 2024

Woo-hoo! Things haven't changed! Good show, Mr. Fed Chair!

I thought was stupid that some were thinking that things had fundamentally changed, and that this would change the interest rate outlook. Job growth is strong, but not at the boom levels we've been at. Inflation may not be at 2%, but it's still hanging at around a 3% rate, as wage growth is at 4-5%, while the Fed Funds rate has stayed at a punitive 5.25%-5.5%.

I'd argue that one of the few overhangs in the economy is an offshoot of the high interest rates, and that's the increasing cost of debt.

Two years after the Federal Reserve began hiking interest rates to tame prices, delinquency rates on credit cards and auto loans are the highest in more than a decade. For the first time on record, interest payments on those and other non-mortgage debts are as big a financial burden for US households as mortgage interest payments.

The figures suggest a difficult reality for the millions of consumers who are the engine of the US economy: The era of high borrowing costs — however necessary to slow price increases — has a sting of its own that many families may feel for years to come, especially the ones that haven’t locked in cheap home loans. And the Fed, which meets next week for a policy decision, doesn’t appear poised to cut rates until later in 2024.

As monthly debt payments take up more of workers’ paychecks, those consumers are more exposed to potential economic contractions.

And the cost of money affects people’s perception of their own prosperity: A February paper from IMF and Harvard University researchers posits that the recent high cost of borrowing — which isn’t captured in inflation figures — is key to understanding why consumer sentiment remains lackluster even as inflation has moderated and businesses are hiring at a healthy pace.

This is where the Fed can really make a difference by putting interest rates back toward the middle of what we've had most of the last 30 years. And at the same time, lowering rates can lessen the chances of people having to make significant cutbacks to their spending habits, and businesses from seeing more defaults that can lead to the downward cascade that ends up in recession and job loss.

Sure, some may think there's a "mandate" to get inflation down to 2%, and that should be emphasized over jobs or paying bills. But as I've mentioned in the past, that 2% goal was something that was just made up in the last 20 years, and that most growing times in the late 20th century had inflation of 3-4%.

With that in mind, I'd rather err on the side of minor inflation over recession and job loss. And given the circumstances in 2024, the best ways to stave off even the possibility of economic decline is to start lowering rates from the high levels that they're at today. Hopefully it comes sooner than later.