More Reasons for the Fed to Relent

Today on TAP: But don’t bet the farm on a saner monetary policy.

by

The latest inflation report from the Bureau of Labor Statistics combined with the continuing crisis afflicting regional banks gives the Federal Reserve good reason to stop punishing the economy with high interest rates. But it remains to be seen whether the Fed will come to its senses.

On Wednesday, the Consumer Price Index showed that inflation is continuing to subside. Prices in April were 4.9 percent higher than a year earlier, the lowest annual increase since the period ending April 2021. Wages were up 4.4 percent, so wages can’t be accused of pushing up prices. Adjusted for inflation, worker income continues to fall behind the cost of living.

A deeper look at the details of the BLS report shows even better news. Food prices did not increase at all in April. Gasoline increased only three-tenths of 1 percent. And the cost of electricity declined. Excluding food, energy, and shelter, where the BLS’s measure is misleading, the annual rate of inflation was just 3.7 percent. (Commercial indexes show rental costs and housing prices subsiding.)

Meanwhile, the crisis of regional banks seems to be deepening, an indirect casualty of the Fed’s high interest rates. Last week, panicky depositors pulled out 9.5 percent of PacWest's total deposits, and stock trading had to be suspended because of chaotic market conditions. Even so, the value of PacWest stock fell 23 percent yesterday, and PacWest was said to be seeking a buyer.

As I suggested in a recent post, the continuing woes of regional banks are the result of speculators shorting the bank’s stock, combined with bad Fed policy, which turns such speculation into a self-fulfilling prophecy. Given all of this, you might think that the Fed would relent. But several key Fed officials are still obsessed with the unrealistic inflation target of 2 percent, including New York Fed President John Williams.

Meanwhile, the economy continues to generate an impressive number of jobs, 253,000 in April, or far more than had been predicted by most forecasters. If we do manage the elusive “soft landing,” and avoid a recession, it will be no thanks to the Fed.

I’m writing to you today with a sense of urgency that I haven’t felt since I began my journalism career. As executive editor of The American Prospect, I’ve witnessed firsthand how independent journalism serves as a crucial bulwark against the erosion of our democratic institutions. Today, that role is more vital than ever. Can you step up today and show your support?

The winds of authoritarianism are blowing stronger. We’re seeing alarming signs of a coordinated effort to silence critical voices and undermine the very foundations that support progressive causes. As Bob Kuttner presciently wrote in our August 2024 issue, a weaponized IRS could attack the very foundations of the progressive movement. We need readers to step up and help us dig in for the long haul.

We’re falling behind in our spring fundraising campaign, and with so much at stake we can’t afford to come up short. If you value fearless, independent journalism that holds the powerful accountable and defends democracy, now is the time to step up. The American Prospect depends on reader support to stay in the fight. Pitch in today and help us close the gap. Please consider making a donation today.

–David Dayen, Executive Editor