Whether to keep raising interest rates and at what pace are genuinely difficult questions, especially since the Federal Reserve has imprecise announced goals and lacks good tools for measuring whether it’s on track to attain them. One example with respect to goals: Among the sub-questions Fed officials ought to be asking themselves is whether they should be aiming to get inflation back down to two percent and keep it there, or get it below two percent in order to hit a two-percent average for the 2020s. I think you can make a case for either alternative based on what the Fed has said in the past and how it has been received by markets, but they would have different implications for the future path of interest rates and economic growth.
There is, then, a lot of room for disagreement and debate about what the Fed should do given the situation it has gotten itself into. I’m seeing one argument for the Fed to ease up, though, that seems clearly mistaken: the argument that inflation is coming down and therefore the Fed should stop raising interest rates. Fed chairman Jerome Powell said this week that his colleagues and he are not persuaded that inflation is dropping in a sustained manner, let alone that it is dropping enough. Even if the Fed were so persuaded, though, it would not settle the policy question. A sustained reduction in inflation, assuming we are having one, could be based in part on the market’s expectation that the Fed is going to keep raising rates. If that’s true, then to the extent the Fed seems to be winning the fight against inflation, that’s a case for it to stay the course.