Expert insight
Lower interest rates this year? Not if the Fed respects history
May 30, 2023
“We’re not on the cusp of another Great Inflation,” the painful 1965–1982 period of surging prices for U.S. goods and services. Yet Federal Reserve policymakers and investors need only consider history—and a few key indicators of current economic conditions—to realize that the fight against inflation is not won.
So argues Joe Davis, Vanguard’s global chief economist and global head of the Investment Strategy Group, in a recent guest column for Barron’s. (Note that Barron’s content is available by subscription only.)
History suggests that the U.S. needs higher rates for longer
Davis compares the state of the U.S. economy today with that of 1967, a year some observers flag as a guidepost to a “soft”—or recession-free—economic landing. Parallels between the periods go only so far, he writes, but they offer three lessons:
- Fed policymakers should raise interest rates well above the current inflation rate and hold them there for at least a year.
- The Fed should limit its reliance on unobservable indicators, such as the “nonaccelerating inflation rate of unemployment” and the “neutral rate of interest.”
- A balance between the supply of and demand for labor is critical. One key indicator, the ratio of job openings to the number of unemployed, shows that the Fed must continue its campaign against inflation.
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Related links:
- Our investment and economic outlook, May 2023 (article, issued May 2023)
- In America and Europe, higher rates for longer (article, issued May 2023)
- Personalized inflation hedging: A closer look at your true consumer price index (research paper, PDF, issued February 2023)
- Constructing inflation-resilient portfolios (research paper, PDF, issued January 2023)
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