The Path to Prudent Policy

Fed’s dual mandate of full employment and moderate inflation ensures conflict at turning points. The challenge for the Fed is finding the balance to ensure the long-sought “soft landing” of the economy. The “higher rates for longer” policy led to gradually lower inflation while employment growth continued modestly. The prolonged elevation of interest rates will eventually result in a slower economy and lower employment. The Fed’s policy path will determine the depth of the economic slowdown. The trouble arises with housing: dramatically lower interest rates in response to the Pandemic fed the housing market. Excess housing demand over constrained supply drove housing prices and rents higher. The Fed faces the same risk as it seeks the timing for rate cuts: lower interest rates may again lift housing prices and limit disinflation. The prudent path is policy moderation.