FAU Economist: Caution in Fed's Rate Cut Sparks Concern
The Federal Reserve’s recent decision to lower its federal funds rate target marks a cautious step toward easing monetary policy, though too much caution raises concerns about an incoming recession, according to an economist at Florida Atlantic University.
The Federal Reserve’s recent decision to lower its federal funds rate target marks a cautious step toward easing monetary policy, though too much caution raises concerns about an incoming recession, according to an economist at Florida Atlantic University.
While the Fed wants inflation to fall further, there are risks if monetary policy becomes too tight. Should the Fed hold its federal funds rate target too high for too long, it could cause a recession.
“With inflation now running below target, the risk of resurging inflation is much smaller, and the risk of recession is much larger,” said William Luther, Ph.D., associate professor of economics in the College of Business. “Now is the time to ease up. If the Fed neutralizes the stance of monetary policy quickly and completely, it may yet avoid a recession. If it delays, as Federal Open Market Committee members project, we may not be so lucky.”
The Personal Consumption Expenditures Price Index (PCEPI), the Fed’s preferred measure of inflation, grew at a continuously compounding annual rate of 2.2% over the last year. However, it has slowed considerably in the past few months. PCEPI inflation has averaged 1.9% over the last six months and 1.4% over the last three months. In August, it was just 1.1%.
Core inflation, which excludes volatile food and energy prices and is therefore thought to be a better predictor of future inflation, has also declined. Core PCEPI grew at a continuously compounding annual rate of 1.6% in August. It has averaged 2.4% over the last six months and 2% over the last three months.
Over the last year, Fed officials have been looking for evidence that inflation is moving sustainably toward the 2% target. According to Luther, the latest data show inflation has already returned to 2%.
“If anything, inflation appears to be somewhat below target today,” Luther said. “Although the Fed has successfully reduced inflation over the last two years, it seems reluctant to declare victory.”
Monetary policy is still tight today and is projected to remain tight through 2025. More cuts are projected for 2025, but not enough to return the stance of monetary policy to neutral, Luther said.
-FAU-
Latest Research
- How Florida's Guardian ad Litems Build Trust with Youth in Foster CareResearchers surveyed 555 Guardian ad Litems in Florida to explore how they engage with youth in foster care, the dynamics of these relationships, and the role of training in building and maintaining them.
- New Screener Assesses Bank Resilience Amid CRE ConcernsAs the U.S. banking industry faces pressure from unrealized losses on securities and exposures to commercial real estate, a "stress test" from a FAU finance professor reveals another vulnerability.
- Experts Challenge Aspirin Guidelines Based on Flawed Trial RelianceExperts argue that the flawed results of the ASPREE trial unduly influenced aspirin restrictions, highlighting the need for rigorous statistical principles in trial design to avoid misleading conclusions.
- FAU Secures $1.3M NIH Grant for HIV Self-Test Technology BreakthroughFAU engineering and biomedical researchers are working to meet a critical global health need by developing a reliable, rapid and affordable HIV test for early detection, with an expected cost of under $5.
- FAU Announces Winners of 2025 'Three Minute Thesis (3MT®) Competition'Florida Atlantic University has announced the winners of the ninth annual Three Minute Thesis (3MT®) Competition hosted by the Graduate College.
- AI 'Speaks' Genetic 'Dialect' to Predict Future SARS-CoV-2 MutationsFAU engineering researchers have developed a powerful AI model called Deep Novel Mutation Search that predicts SARS-CoV-2 virus mutations more accurately and efficiently than costly and lengthy lab experiments.