For those of you who were forced to sit through Euclidean geometry in high school, conditional statements were part and parcel of the subject matter. The conditional statements based on “if-then scenarios” were important elements of geometric problem-solving. In many ways, the Federal Reserve also relies, quite a bit, on the conditionality of an “if-then” hypothesis. For example, if inflation is well on its way toward falling to the Fed’s mandated 2% target, then the Fed can begin cutting rates, as Chair Jerome Powell indicated last week. If employment growth has slowed meaningfully, then the Fed also should be lowering interest rates to ward off an unwelcome labor-led recession. If the downward revisions to the number of jobs created, between April 2023 and March 2024, showed 818,000 fewer positions , then there is further evidence the Fed should embark upon an easing cycle. If the rate of job growth, on a monthly basis, has slowed from the downwardly revised monthly job gains of 174,000 per month in that same period, then the Fed should definitely cut rates in September. And, if monetary policy works with long and variable lags, as Fed officials and economists insist, then the Fed should be cutting rates by a half, rather than a quarter, point next month to ensure it is not behind the curve in supporting a healthy labor market. In short, if the Fed is now more worried about impending weakness in the economy, though not yet fully evident, then it should act preemptively to stick the so-called soft landing. There is a geometric consistency to all this as the Fed, in order to avoid a vicious inflation spiral when raising rates, now hopes to ensure a virtuous circle by keeping the economy on a level plane. Fed policy is always conditional, dependent on incoming data to determine the best course of action. While it is true that consumer spending appears to be holding up, there are emerging pockets of weakness in the economy that should be pushing the Fed to triangulate. It needs to divide the risks facing the economy into its constituent parts and make judgments based on the greater likelihood of incoming weakness rather than an unlikely reacceleration of inflation. True, there are geopolitical risks that could push up energy prices and, by extension, consumer prices overall, but as we have seen in the recent past, those pressures have proven to be quite transitory of late and, thus, should not affect the Fed’s forward-looking policy decisions. Looking to the Greeks can have its benefits as the Fed should be having a “Eureka” moment right about now. Of course, it was Archimedes who coined that phrase, not Euclid. But Archimedes was focused on the purity of a gold crown at the time — the record price of gold, and its attendant meaning, is another problem to be solved some other day. For now, our “if-then” hypothesis suggests the Fed worry more about the “then” than the “if.”
