Take Me Home, Consumer Price Index

The May 2024 CPI numbers were released on Wednesday, and monthly CPI was unchanged month-on-month and up 3.3 percent over the last 12 months. That is the lowest monthly inflation number in two years. It also marks exactly one year of stable yearly inflation that has stayed between three and four percent. It is still not the desired two-percent rate that historical norms and the Fed are shooting for. The debates over cutting interest rates this year, and whether it should be one or three percent, seem to be talking points that are just being repeated to have something to talk about.

The effective interest rate set by the Fed is 5.33 percent and hasn’t moved since August 2023. The last time the Effective Federal Funds Rate was unchanged above five percent for this long was July 2006 to July 2007. In August 2007, the Fed started cutting rates and didn’t stop until taking them to near-zero by December 2008. As interest rates were being lowered, quantitative easing was also engaged with massive bailouts for banks as the mortgage crisis hit. The recession from the mortgage crisis was out of the Fed’s control by that time, and would not have been changed by two or three rate cuts that were three or four months earlier.

The same could be true this time around, should a recession be waiting for us in the near or distant future. The die was cast with the extraordinary events and actions taken between 2020 and 2022. The timing of rate cuts will not be the economy’s saving grace should it come under fire. Until the unemployment rate goes above five percent (currently at four percent) or the annual inflation rate gets to 2.5 percent, cutting rates seems irresponsible. Talking heads can second-guess all they want if we drop into a recession, but inflation is still Public Enemy No. 1 for the Fed. If inflation is not under control and allowed to return, the worse the eventual recession will probably be.

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