Federal Reserve Leaves Interest Rates Unchanged For The Time Being
NOEL KING, HOST:
The Federal Reserve, yesterday, decided not to cut interest rates. That's a disappointment for President Trump, who's been calling loudly for lower interest rates. But the Fed did send a signal that it expects to cut rates later this year.
Why? Well, Fed Chair Jay Powell cited cross currents in the economy. One of those cross currents is this: the Fed thinks prices are rising too slowly. It wants more inflation.
David Wessel is on the line with me now. He's director of the Hutchins Center at the Brookings Institution.
DAVID WESSELL: Good morning.
KING: So we usually think, David, that the whole point of the Federal Reserve is to resist inflation. Why would it want more?
WESSELL: Well, this is really a big change. The Fed's mandate is maximum sustainable employment and price stability. And it defines that, as you said, at 2% inflation. But it's been unable to get it up to that level for some time. And it had been expecting inflation to pick up, but it hasn't. It's only running at about 1.7, 1.8%.
This is causing concern at the Fed. And Jay Powell, the Fed chairman, talked about this at his press conference yesterday.
(SOUNDBITE OF PRESS CONFERENCE)
JAY POWELL: Wages are rising, as noted above, but not at a pace that would provide much upward impetus to inflation. Moreover, weaker global growth may continue to hold inflation down around the world. We are firmly committed to our symmetric 2% inflation objective.
KING: I think we often think of inflation as inherently bad. So why worry if it's running below the 2% target - at 1.7, 1.8%?
WESSELL: Well, there are a few reasons for that. One of them is that the Fed believes that its credibility with the public and the financial markets depends on it delivering on its objective of 2% inflation. If it fails at that, it gets concerned that people might overreact when something unusual happens - say, a weather-related spike in oil prices or food prices or a big swing down in oil prices or something.
Second, too much inflation is a problem, but too little is a problem, too, in part, because it brings the economy too close - uncomfortably close to what they called deflation - falling prices. And once that happened, as we learned from Japan, the economy can really struggle, and particularly, borrowers can have a hard time paying back their loans.
And third, if inflation gets too low, then interest rates get uncomfortably close to zero. And that limits the Fed's ability to cut interest rates if we have a recession, and that's very much on their mind at the moment.
KING: Yeah, it is. And let me ask you why. I mean, the U.S. economy has been growing for nearly 10 years now. It's about to set a record for the longest expansion in recorded U.S. history. Why aren't prices and wages rising faster - why this concern about a recession?
WESSELL: Well, I think there's concern about a recession for a number of reasons - some signs of weakening in the economy and the prospect of the president's trade war. On the inflation front, there's a lot of concern and a lot of debate among economists about why inflation hasn't been behaving as expected. There are lots of explanations out there. Perhaps globalization is making it harder for anyone to raise prices. Or maybe it's technology; you know, the fact that we can all shop around online makes it harder for businesses to raise prices.
Or maybe the economy isn't as close to full employment as we used to think when we get a low unemployment rate, so there's no need to raise wages. Or maybe it's connected to the waning clout of unions and the power of employers.
One thing that's really interesting and important is this is not only happening in the U.S. Inflation in Japan and in the European Eurozone has also been stubbornly below the Fed's target.
KING: That was a staggering amount of maybes, David (laughter). I guess that's what you get when you talk economics.
David Wessel of the Brookings Institution. As always, David, thanks so much.
WESSELL: You're so welcome.
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