Isaac Newton said, “An object at rest remains at rest, and an object in motion remains in motion at constant speed and in a straight line unless acted on by an unbalanced force.” But does this also apply to the economy?”
(Image created by ChatGPT 4o)
Sometimes, the Fed is the outside force.
Inflation is a perpetual occurrence. There are always increases and decreases in inflation. In June, we learned that the Consumer Price Index (CPI) slowed to 3.3%. This means inflation has been slowing, but has not come down to the Fed’s target of 2%, thus the Fed will continue to monitor economic variables until it does.
(fred.stlouisfed.org, Sticky Price Consumer Price Index less Food and Energy (CORESTICKM159SFRBATL), 06/01/2023 - 05/01/2024)
The Fed can’t control inflation. Neither can Congress. Neither can the President. Neither can the Cookie Monster. 🍪🍪🍪
The Federal Reserve has been working on slowing inflation for two years now. It has been doing this with its big stick, raising the federal funds rate and keeping it raised. This is what has been deemed “higher for longer”.
The Fed is still working on achieving the elusive “soft landing”.
(A soft landing is when the Fed raises interest rates to slow inflation but stops short of having the economy slip into a recession.)
But in my opinion, that managed to do it so far.
Here is a chart that the Atlanta Fed’s GDPNow Q2 GDP forecast has significantly slowed from more than 4% in mid-May to below 2 percent in early June. It’s bounced up a little, but trending lower.1
Pro Tip: We’ll get a preview of what Q2 GDP could be through the advanced estimate on July 25 by the Bureau of Economic Analysis. 2
For now, the economy has continued to grow.
For now, inflation has slowed.
For now, cookies aren’t going up in price as fast as they did in 2022 or 2023.
All of these very important facts give the Fed leeway to achieve full employment and manage inflation in the long run.
Going back to Isaac Newton, an economy in motion may stay in motion. In our case, if the Fed becomes a force of change, it could very well change the economy's motion. Maybe by a lot, perhaps just a little. We can only wait and see.
1. AtlantaFed.org, June 7, 2024
2. BEA.gov, May 30, 2023