Inflation Has Been Coming Down So Fed ’s Rate Pause Is Reasonable

Norbert Michel andJai KediaOn Wednesday the Fed decided to keep its rate target steady, ina  range of 5.0 percent to 5.25 percent. On the heels of one of the steepest rate ‐​increasing campaigns in its history (the target was near zero in February 2022), Fed officials are selling this choice as a pause. According to Fed ChairmanJay Powell:We have raised our policy interest rate by five percentage points, and we ’ve continued to reduce our security holdings at a brisk pace. We’ve covered a lot of ground and the full effects of our tightening have yet to be felt.Given the recent inflation figures, it ’s difficult to argue with Powell.Since June 2022, the month ‐​to‐​month change in the core CPI averaged 0.4 percent, and the last three months were perfectly flat (at 0.4 percent). Since reaching a high of 0.8 percent in April 2021, the month‐​to‐​month change has been on a slow and steady decline. In other words, inflation has been falling . (And asthis post points out, it ’s the recent inflation trend that matters most because the annual rate will remain elevated even if the monthly changes stay flat).The full CPI rate, more volatile as usual, has also been on a  mostly downward trend, with a 0.3 percent month‐​to‐​month average since June 2022. From April 2023 to May 2023, the full CPI increased 0.1 percent, a figure that represents a 1.2 percent annual inflation rate. The average for the previous three months is 0.2 percent, an ann...
Source: Cato-at-liberty - Category: American Health Authors: Source Type: blogs