The Fed risks falling behind the curve (again)

Chairman Powell decided to keep rates at their current range of 4.25% to 4.5%, citing uncertainty over the impact of tariffs on inflation.

There’s been significant debate over the Fed’s interest rate policy this year, mainly because of  tariffs.

Most economists agree that tariffs can increase consumer costs. However, there’s disagreement over whether their impact on inflation is temporary or lasting.

Powell infamously incorrectly labeled inflation in 2021 as transitory, a major miscalculation that allowed inflation to take hold and accelerate to over 8% in 2022.

If Powell had acted faster to raise rates, the Fed may have avoided embarking on the most hawkish rate policy since former Fed Chair Paul Volcker fought inflation in the 1980s by sending interest rates to double digits.

The Fed’s rate hikes in 2022 and 2023 successfully lowered inflation below 3%, but higher rates have caused cracks in the job market. The unemployment rate was 4.1% in June, up from 3.4% in 2023.

The Fed’s dual mandate is low inflation and unemployment, two often contrary goals. When the Fed raises rates, it lowers inflation but slows economic activity, increasing unemployment. The opposite occurs when it lowers rates.

Changes to the Fed Funds Rate influence everything from credit card interest to mortgage rates because it’s the interest rate that banks charge each other when lending or borrowing reserves from each other overnight.