Will the Fed Break the Inflation Cycle?

This month’s chart feels especially timely, given how many of us eagerly await the Federal Reserve’s decision in September on short-term interest rates. Some expected the Fed policymakers to wait
until after the election to determine the next steps with rates. Still, at a recent meeting of global bankers, Fed Chair Powell said, “The time has come for policy to adjust.”

It’s always hard to say exactly what will happen next, but as we wait, this is an ideal moment to step back and take a bird’s eye view of where inflation stands, according to a 2023 White House report that shows long-term trends.

Where are we in the inflation cycle?

As you can see, overall inflation in the U.S. spiked roughly two years ago. However, we appear to be near the end of the inflationary cycle, which is why the Federal Reserve is becoming more comfortable discussing policy adjustments. It doesn’t hurt that the U.S. seems to be heading toward the Fed’s long-held 2 percent inflation rate goal, either.

Many believe that this is a pivotal transition as the Fed now appears more concerned about supporting the labor market while the progress on inflation continues.

What’s the Federal Reserve thinking now?

The Fed is most likely trying to strike a balance between managing expectations and adjusting monetary policy—it wants to avoid overpromising and underdelivering.

Final Thoughts

The Federal Reserve has signaled that it’s poised to lower rates as we near the end of the inflation cycle. As we see rate cuts come into play, we’ll continue to monitor the broader economic implications.

CNBC.com, August 23, 2024. “Fed Chair Powell indicates interest rate cuts ahead: ‘The time has come for policy to adjust’”