Why is the Fed cutting interest rates?

With GDP growing at a 3% rate and with unemployment at 4.1%, interest rate cuts will add to excess demand.

The Federal Reserve has said it is committed to reducing inflation from the June 2022 high of 9.1% back to under 2%. To do this, the Fed has aggressively raised interest rates, from mid-2022 and to mid-2023. Then, in July 2023, the Fed stopped the rate hikes. Now the Fed is cutting interest rates. The question is why?

The Federal Reserve’s monetary policy has three goals: Price Stability, Full Employment and Growth. Since it forgot about the first goal from January 2021 when inflation started to climb, to June 2022, it compensated with its aggressive rate hikes.

For some reason, it halted the rate hikes after July 2023. Although the inflation rate had fallen from the 9.1% peak to under 4%, the pause in interest rate increases allowed inflation to linger.

Instead of the inflation rate continuing its rapid decline, it stalled. The decline was helped by the weak worldwide demand for energy, which led to lower prices. Without the decline in energy prices, today’s inflation rate would be about 3.3%, certainly not near the Fed’s 2% target.

The Fed will respond to this criticism by noting it prefers to look at the Personal Consumption Expenditure (PCE) to gauge inflation. That…