Economists warn Fed on inflation risks ahead of rate decision

The Federal Reserve is set to discuss potential interest rate cuts at its upcoming meeting, amid warnings from economists about the risks of inflation. Thomas Hoenig, a former Federal Reserve Bank president, expressed concerns that current inflation levels may be underestimated, citing core CPI figures that have remained above three percent for over a year. He emphasized the need for caution in any decision to lower rates, suggesting that reversing course could lead to disastrous consequences for the economy. Stephanie Pomboy, another economist, echoed these sentiments, highlighting the importance of monitoring headline CPI numbers, which have shown unfavorable trends for the Fed. Since President Biden took office, inflation has surged, with the CPI increasing by 20% and gold prices rising by 30%. Recent data indicates a slowdown in price growth, with year-over-year inflation at 2.5% as of August. Despite the Fed's previous decision to maintain a high benchmark federal funds rate, there is growing market anticipation for a series of interest rate cuts. Fed Chairman Jerome Powell has indicated that the central bank may not wait for inflation to reach the target rate of 2% before making adjustments. However, Hoenig cautioned against aggressive cuts, suggesting that a modest 25 basis point reduction would be more prudent than larger cuts of 50 or 75 basis points. The economists' warnings reflect a broader concern about the potential impact of inflation on the economy and the importance of careful monetary policy decisions. As the Fed prepares for its meeting, the balance between stimulating growth and managing inflation remains a critical challenge.