Chief Economic Advisor to the Government of India

• The Federal Reserve’s decision to hold rates steady signals that central bankers believe it is time to hit pause, at least temporarily, on their aggressive campaign to tame runaway inflation.
• The latest data, not to mention several other factors, however, suggests it’s time for a full stop.
• Over 10 consecutive hikes beginning in March 2022, the Fed had raised rates a whopping 5 percentage points.

Inflation is lower than it appears

• The fastest rate of inflation since the 1980s is what prompted the Fed to hike interest rates so much.
• So it makes sense that inflation would be a key indicator of when its job is complete.
• Using current rents would put inflation much closer to where the Fed wants it to be.
• Jason Furman, former chair of the government’s Council of Economic Advisors, created a modified version of core inflation – which uses a market-based measure of shelter prices – at 2.6%.

The risk of more rate hikes

• Moreover, it is likely that further rate hikes will do more harm than good – particularly to the banking sector – and without helping lower inflation below its current trajectory.
• Several regional lenders, including Silicon Valley Bank and First Republic, collapsed earlier this year following bank runs.
• While there were several factors behind the banks’ demise, an important one was the Fed’s aggressive rate hikes, which caused the value of many of their assets to fall.
• The banks catered to depositors with accounts that exceeded the US$250,000 threshold protected by the Federal Deposit Insurance Corporation.

Don’t make the same mistakes

• The Fed was behind the curve in 2021 and 2022 in realizing inflation was getting out of control, and it has been historically slow in recognizing the impact of rental rates on inflation.
• But if it continues to raise rates, I believe the central bank will be repeating the same mistakes it made in the past.