The Fed has raised the funds rate 11 times in two
years since quantitative easing drove inflation out of control. Raising
interest rates helped reduce inflation from 9.1% in June 2022 to 3.1% this
year.
While Jerome Powell has signaled
the Fed may delay rate hikes this year, a pause doesn’t appear to be coming
soon. With the latest inflation data still above the 2% target, the Fed is
cautious about whether to actually cut interest rates next. The Fed must
ensure that inflation remains under control if it does cut rates one day.
Many economists predict that the
Federal Reserve will only begin to scale back interest rate hikes in the second
half of the year, supporting that the U.S. economy is still strong and the
unemployment rate is relatively low.
But if the Fed continues to raise
funds rates, higher borrowing costs will cause the U.S. banking industry to
repeat the collapse of Silicon Valley Bank and Signature Bank this year, which
means that the banking industry may face more turbulence and credit crunch. A
shift from a soft landing to a hard landing may be more likely. If interest
rates are raised too early, inflation could accelerate again. A subsequent rise
in inflation could lead to a fall in real incomes, which could lead to another
round of labor shortage. Economic activity is likely to decline as the
workforce becomes less interested in joining the labor market.
Rather than implement another round
of rate hike to regain control of inflation and unemployment, it would be
better to continue to delay cutting interest rates until the best time.