Federal Reserve Chairman Jerome Powell is betting that inflation is near dead and that’s good for equity investors.

At the beginning of an easing cycle, a 50 basis point cut in the federal funds rate usually is reserved for crises. For example, the surge in mortgage foreclosures at the onset of the Global Financial Crisis.

No such calamity appears eminent.

Unemployment at 4.1% is low by historical standards, the ratio of job openings to unemployed has normalized, and Mr. Powell expects GDP growth to continue at a 2.2%.

Consistent with the Fed’s mandate to maintain price stability and maximize employment, he believes “inflation is moving sustainably toward 2 percent,” and inflation expectations are “well anchored”.

However, the average of the University of Michigan, New York Federal Reserve Bank and Conference Board surveys indicates consumers anticipate prices will rise about 3% or more over the next year.

That’s no surprise.

Vice President Harris promises federal action to remedy alleged price gouging at grocery stores and acute housing shortages. Rising rents, homeowners and automobile insurance and other services are pushing up the cost of living.

Most progress on inflation has been in goods prices—China’s economic malaise is pushing down the demand for oil and flooding global markets with excess manufactures.

In August, the Consumer Price index was up 2.5%, but core inflation—prices less energy and food—was rocking along at 3.2%.

Rents are up 5%, the broader cost of shelter was up 5.2%, and builders face land and labor shortages and rising regulatory costs.

Most troubling, service prices, less housing and energy, are still rising 4.5% annually.

Over the past year, the economy has added 203 000 jobs per month, significantly more new jobs than the 80,000 possible based on population growth and regular legal immigration. New entrants receiving temporary asylum and just otherwise entering the country are working too.

Though President Biden has tightened the border, the tide of irregular immigrants remains well above pre-COVID levels. The surge of immigrants likely accounts for much of the increase in unemployment from 3.4% last year and makes questionable warnings of a pending recession premised on the joblessness count.

Employment needs are shifting. For example, Microsoft, Alphabet, Apple and Meta have laid off workers in some activities, but spend more in developing artificial intelligence products.

Overall, investment in plant and equipment has improved this year thanks in part to surging purchases of Nvidia processors, servers, new data centers and grid capacity.

Layoffs have not elevated to the level that would create a self-feeding cycle of job cuts, lower consumer spending and then consequential additional furloughs.

Chairman Powell got it wrong in 2021 when he said the surge in inflation would be transitory, but notes “the good ship Transitory was a crowded one, with most mainstream analysts and advanced-economy central bankers on board.”

He attributes the debacle to COVID and other supply disruptions, but the Fed enabled trillions in pandemic-era federal spending by printing $4.8 trillion to purchase treasury securities.

With his decision to take bold action now, he’s got broad support again.

Prior to the September meeting, several hawkish Fed board members and prominent commentators called for a half point rate reduction.

Large rate cuts will create a surge in liquidity again by permitting banks to borrow and raise money more cheaply and charge less for credit cards balances, auto loans, home equity loans and mortgages. Small businesses relying on revolving credit lines should get lower rates too.

Don’t be surprised if next year inflation picks up—as happened to Chairman Arthur Burns when he abandoned monetary discipline to boost the Nixon economy and Chairman Paul Volcker when he first raised interest rates only to pull back too soon to combat a recession.

Ultimately, draconian interest rate increases were needed as inflation spiraled up through successive incomplete attempts to stabilize prices.

Over 100 experiences with inflation across 56 countries since the1970s indicates premature celebrations and interest rate cuts generally cause inflation to come back, more unemployment and greater macroeconomic instability.

On average, it takes over three years of tight money to lick inflation—the Fed quit after just 30 months.

Even if inflation heats up, equity investors should benefit.

Near term, if we can avoid a recession, lower interest rates should boost stock prices.

Longer term, the 40-years prior to the Global Financial Crisis, inflation averaged 4.0%, average 10-year treasury yield was 7.4%, appreciation on existing homes was 5.6% and the S&P 500 return averaged 10.5 percent.

Don’t focus solely on AI unless you can pick the next Nvidia. Sector focused funds, like those recently homing in on AI, generally don’t beat the broader market.

_______________
Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.