Economic News + Lessons from History | Investopedia

 It's important to note the Fed's mandate from Congress calls for it to control inflation, and the Fed has deemed the level at which that happens as 2%. The Fed doesn't have a statutory responsibility to consider the economic impacts of its policies.

Fed Says Rates Near Their Peak—But History's Rife With Premature Inflation Victories

Research shows fighting inflation usually produces quick results that don't last

By 

LYLE NIEDENS

Full Bio

Lyle spent most of the past two decades in a variety of product, communication and financial writing roles with large asset managers and mutual fund distributors, mostly recently as vice president, director of product development with Waddell & Reed/Ivy Distributors Inc. Previously, he spent a decade in senior roles as an editor and reporter with business publications and financial news wires, including Dow Jones, BridgeNewsand Knight-Ridder Financial News. A graduate of the University of Kansas with an M.B.A. and a B.S. in journalism, he lives in Westwood, KS, a suburb of Kansas City, with his wife, Caryl, and their sons, Conley and Pierce.

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Published December 14, 2023

ERIC BARADAT / AFP via Getty Images

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KEY TAKEAWAYS

• An International Monetary Fund (IMF) study found countries generally succeed in quickly pushing inflation lower—but it almost always reaccelerates.
• The Federal Reserve's rate hikes have helped annual U.S. inflation fall by two-thirds, yet it still remains higher than desired.
• The Fed's latest plan to cut its benchmark rate by 75 basis points (bps) in 2024 may aid a soft economic landing, but it carries long-term inflationary risk.

In its zeal to reduce inflation, the Federal Reserve appears to have eased its foot off the interest-rate accelerator, and, for the first time in months, has mentioned trimming rates next year. But a recent working paper from the International Monetary Fund (IMF) suggests that eliminating inflation altogether may require keeping the pedal to the metal.

The Fed said Wednesday that it doesn't plan to raise interest rates further and now expects to cut its benchmark rate by 75 basis points (bps) next year, up from its previous projection for 50 bps in cuts in 2024.

U.S. inflation has fallen dramatically from 40-year highs. But it remains higher than the Fed's stated 2% annual target, even after an almost two-year string of the most significant rate hikes in two decades.

Inflation's persistence is not unusual. The IMF's study reiterates the nagging nature of rising prices once they get rolling—and how countries usually prematurely celebrate victories over inflation.

History Lessons

The IMF reviewed data from more than 100 inflation "shocks" since the 1970s.1 

• It discovered that 60% of the time, it took an average of three years for a country to push inflation down to its pre-shock level. 
• In the remaining cases, inflation failed to return to pre-shock levels, even after five years.
• What's more, the study found that 90% of the time, countries succeeded in pushing inflation down sharply in the first few years after it surged, only to see it reaccelerate or remain higher on an ongoing basis than before it initially spiked.

"Today's policymakers must not repeat their predecessors' mistakes," the paper said. "Central bankers are right to warn that the inflation fight is far from over, even as recent readings show a welcome moderation in price pressures."2

"Countries that allow inflation to linger ultimately pay a higher price."

Reuters

Central banks ramp up rates again but the pace slows | Reuters

Statista

Chart: The Most Aggressive Tightening Cycle in Decades | Statista

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Fed Says Rates Near Their Peak—But History's Rife With Premature Inflation Victories