Fed Not Likely to Lower Rates Amid Disappointing Economic Growth, Says Economist

Federal Reserve Chair Jerome Powell testifies before the House Committee on Financial Services in Washington, on June 23, 2022. Win McNamee/Getty Images

The persistence of inflationary pressures during the administration of President Joe Biden leaves the Federal Reserve with little choice but to raise interest rates or keep them at their current level at its Wednesday rate meeting, if Fed policymakers do not want Americans’ severe economic woes to get even worse.

That’s the view of Ivan Pongracic, a professor in the economics department of Hillsdale College in Michigan, who said he has seen only limited progress toward the Fed’s announced goal of a 2 percent inflation target.

When it met at the end of January, the policy-making Federal Open Market Committee (FOMC) decided to keep interest rates within a range of 5.25–5.50 percent, and a similar decision is likely in the current economic circumstances, Mr. Pongracic and others believe.

Projections in The Wall Street Journal and elsewhere concur that the FOMC is likely to keep interest rates at their current levels when it deliberates Wednesday, but they do not acknowledge the role of extreme fiscal profligacy in driving inflation and limiting the committee’s choices.

As the 2024 election draws ever closer, with economic issues at the top of many voters’ concerns, the FOMC cannot insulate itself from the harsh realities that make many see the incumbent president’s fiscal record as his biggest vulnerability, along with ongoing concerns about his age.

“It would be reckless of the Federal Reserve to begin to lower interest rates at this point, while inflationary pressures clearly still exist in the economy. The Fed chose a 2 percent inflation target for itself—as measured by their chosen inflation gauge, the Personal Consumption Expenditures (PCE) price index—and though there has been a great deal of disinflation over the past couple of years, they have not attained that goal,” Mr. Pongracic told The Epoch Times.

The PCE index currently stands at 2.4 percent, having decreased less than expected as of the end of February, he noted.

Fiscal Profligacy

In December 2023, Brian Domitrovic, a professor at Sam Houston State University in Texas who follows fiscal policy and long-term economic trends, predicted that extremely high rates of government spending would continue to hamper economic growth—a view that Mr. Pongracic shares.

Though Mr. Domitrovic acknowledged that a slight amelioration in the unemployment rate may have helped Democrats slightly in the 2022 midterm elections, the expansionist policies that he and other experts blame for the persistence of inflation and other disappointing indexes have been a leitmotif of the current administration.

Thanks to the $1.9 trillion American Rescue Plan Act of 2021, the $816.7 billion National Defense Authorization Act signed into law in December 2022, the $1.7 trillion Consolidated Appropriations Act signed in December 2023, and other huge spending packages—including a $460 billion spending bill signed just this month in the hope of avoiding a government shutdown—the pressures have not eased under the incumbent president.

President Biden’s expansionist fiscal policy has helped drive inflation under his administration to the highest levels since the Jimmy Carter administration of the late 1970s. According to Investopedia figures, the average year-over-year inflation rate under President Biden stands at 5.7 percent, compared to 1.9 percent under Republican Donald J. Trump, 1.4 percent under Democrat Barack Obama, 2.8 percent under Republican George W. Bush, 2.6 percent under Democrat Bill Clinton, 4.3 percent under Republican George H.W. Bush, 4.6 percent under Republican Ronald Reagan.

Under Democrat Jimmy Carter, who presided over an oil crisis when gas prices reached record heights and whose administration became synonymous with high inflation, the year-over-year inflation rate was 9.9 percent, a figure that President Biden came close to matching in June 2022, when the U.S. inflation rate stood at 9.1 percent.

Against this backdrop, the FOMC does not have many choices.

“The problem they’re facing is that monetary policy always affects the economy with long and variable rates, so they’re aiming at a moving target. But it seems obvious to me that inflation has not yet been wrung out of the economy and brought fully under control, and if they begin to lower the interest rates too soon, they risk inflation reigniting,” Mr. Pongracic said.

“Judging by the Fed’s own recent statements, they seem to believe the same, so I fully expect them to hold steady at this meeting and keep a close eye on the data going forward,” he added.

The FOMC did not respond by press time to a request for comment.