The U.S. Economy Does Not Need Lower Interest Rates (Yet)

The latest data available on the job market, inflation, and business sentiment all suggest that the current constellation of interest rates is broadly consistent with underlying economic conditions.

While Federal Reserve officials may eventually feel compelled to lower their policy interest rate band, the case for doing so now is weak. Despite the current administration’s best efforts to discourage business investment and hiring, the U.S. economy is still humming along remarkably well. Moreover, the best and timeliest indicators of business sentiment have improved relative to March and April, implying that we may have (temporarily?) found a cyclical bottom. At the same time, inflation is still trending faster than target, with the upside risks larger and more salient than the downside risks. All of which is to say that there are no obvious reasons to think that interest rates are too high relative to economic and financial conditions, irrespective of what some in power may say. The rest of this note digs into the details.

Jobs and Wages

The share of workers aged 25-54 with a job has been stable at a multi-decade high since the end of 2022. While there have been some wiggles in the past 30 months, they are only visible if you zoom in incredibly closely.

Measures of underemployment also look relatively benign, even if they are not quite as good as they were in early 2023. Importantly, most of the (mild) worsening in conditions happened over a year ago, with little change in the past 12 months.