What will the Federal Reserve do now?

The views and opinions expressed are solely those of the author.

In June 2022, when the annual inflation rate peaked at 9.1%, the Federal Reserve began raising interest rates. The rate hikes took the Federal Funds rate from near zero to more than 5.25% by July 2023. The Fed then stopped raising interest rates and in December predicted they would cut rates three times in 2024. Now that it's June with no rate cuts, what will happen at the end of this year?

The unprecedented rapid increase in the Federal Funds rate in the thirteen-month period from June 2022 to July 2023 caused the inflation rate, as measured by the consumer price index, to fall to 3, 1% Based on this rate, the Fed made its forecast of three interest rate cuts in 2024. As of March this year, the Fed was still forecasting three rate cuts.

Last December, some Wall Street experts they forecast up to six interest rate cuts by 2024.

At that time, I expected that there will be no interest rate cuts in 2024 and I wouldn't be surprised if the Fed hiked rates once or twice.

The Fed's latest forecast was that there will be a rate cut by the end of the year. I still believe there will be no rate cuts this year, even though the economy is slowing. Annual GDP growth in the first quarter slowed to 1.3%. It looks like the second quarter growth rate will be in a similar range.

Normally this would encourage the Fed to cut interest rates. Not this year. While the restrictive monetary policy from June 2022 to July 2023 reduced the inflation rate to 3.1%. The rate of inflation has increased since then, and although it fluctuates, the current rate is 3.3%.

Fortunately, energy prices have stabilized, helping to keep inflation low. But with the huge deficits the federal government is incurring with its spending and with current wage inflation, it's hard to see inflation falling below 3%.

That means it will be difficult for the Fed to cut interest rates.

The GDP growth figure for the second quarter will be estimated at the end of July. If the economy is weaker than expected, there will be pressure on the Fed to cut interest rates. However, if GDP growth is stronger than expected, as the Atlanta Federal Reserve The bank currently predicts that the Fed will not cut interest rates.

So what will the Fed do for the rest of the year?

It looks like the inflation rate won't drop much further at the end of the year. If there is any increase in energy prices, inflation could rise. This leaves the Fed with a dilemma.

If they err, they will err on the side of being too aggressive. That's because they made two mistakes in the past that they don't want to repeat.

The first mistake was that they left interest rates close to zero from January 2021, when inflation started to rise, until June 2022 when inflation reached 9.1%. This costly mistake forced them to raise interest rates aggressively after June 2022. If they had started raising rates gradually in early 2021, inflation would not be the problem it is today.

Their second mistake was that they stopped raising interest rates in July 2023. If they had raised rates in September and again in December, the rise in inflation we've seen since the end of last year until today it would not have happened.

I stand by my original forecast made late last year. There will be no rate cuts at all this year, and indeed a rate hike is not out of the question.

Inflation is a cancer and must be treated early and aggressively. The Fed did not address the problem early, so it must address the inflation problem aggressively today, even if it slows the economy and causes a mild recession that raises unemployment.

Inflation negatively affects almost the entire population. The increase in unemployment affects only a small percentage of the population. The Fed's top priority today must be to reduce inflation before it enters the system.

Dr. Michael Busler, Ph.D. is a public policy analyst and professor of finance at Stockton University, where he teaches undergraduate and graduate courses in finance and economics.

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