For those who were forced to study Euclidean geometry in high school, conditional statements are an important part of the subject matter. Conditional statements based on “if-then scenarios” are an important element in solving geometric problems. In many ways, the Fed also relies heavily on the conditional nature of “if-then” assumptions. For example, as Fed Chairman Powell said last week, if the inflation rate falls successfully to the 2% target set by the Fed, then the Fed can start cutting interest rates. If job growth slows significantly, the Fed should also lower interest rates to avoid an unwelcome labor-led recession. If downward revisions to the number of jobs created between April 2023 and March 2024 show a loss of 818,000 jobs, there would be further evidence that the Fed should begin an easing cycle. If monthly employment growth slows down from the downwardly revised monthly employment growth of 174,000 for the same period, then the Fed should definitely cut interest rates in September. And if monetary policy has long and variable lags, as Fed officials and economists insist, the Fed should cut interest rates by half a percentage point next month, rather than by a quarter of a percentage point. Making sure we don’t fall behind the curve in supporting a healthy economy. In short, if the Fed is now more worried about impending weakness in the economy (although it is not yet fully evident), then it should preemptively insist on a so-called soft landing. All this is geometrically consistent, because in order to avoid a vicious inflationary spiral when raising interest rates, the Fed now hopes to ensure a virtuous cycle by maintaining economic levels. The Fed’s policies are always conditional, relying on incoming data to determine the best course of action. While consumer spending does appear to be maintaining growth, some weakness in the economy should prompt the Fed to triangulate. It requires breaking down the risks to the economy into its components and basing its judgment on the greater likelihood of weakness rather than the likelihood that inflation will reaccelerate. It is true that geopolitical risks could push up energy prices and thus overall consumer prices, but as we have seen recently, these pressures have proven to be fairly short-lived and should not influence Fed policy. policy decisions. Focusing on Greece could pay dividends, as the Fed should be having a “eureka” moment now. Of course, it was Archimedes who coined the term, not Euclid. But Archimedes’ concern at the time was the purity of the gold crown – record gold prices, and their attendant implications, were another issue that would need to be addressed later. Currently, our if-then assumptions suggest that the Fed is more worried about the “then” than the “if.”
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