Irina Ivanova
5 min read
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After running interest rates near zero for a decade and a half, the Federal Reserve has turned cautious and is unlikely to cut anytime soon, according to Jeff Klingelhofer, a managing director and portfolio manager for Aristotle Pacific Capital. That’s because the central bank is concerned about social stability and inequality following its brush with record-high inflation—and low rates make inequality worse.
Most everyone knows about the Federal Reserve’s dual mandate. Set by Congress, the charge for the U.S. central bank is twofold: Create the conditions for stable prices (i.e., low inflation) and maximum employment. (The third mandate—to moderate long-term interest rates—flows naturally out of keeping inflation steady.)
Increasingly, though, the third mandate is changing, according to Jeff Klingelhofer, a managing director and portfolio manager for Aristotle Pacific Capital, an investment advisory. And that new task is social cohesion.
It’s a tough call for an entity that has seemed somewhat battered in recent years, bruised by its failure to catch COVID-era inflation in time and, increasingly, in a fight with the president of the United States, who is pressing on the Fed’s nominally independent head to lower interest rates.
“It’s out with the old—financial stability—and in with the new: social stability,” Klingelhofer told Fortune.
Klingelhofer notes that, before the 2007–2009 Global Financial Crisis, the Fed used to be very proactive in raising interest rates, hiking them well before any sign of inflation. Post-crisis, when unemployment was stubbornly slow to fall, critics accused the Fed of hiking rates too quickly and stymieing the recovery. (The Fed’s first rate cut came in late 2015, with unemployment at 5% and the Fed’s preferred measure of inflation at just 1%.) Inflation didn’t come close to hitting the Fed’s 2% target for seven years after the hike. Years later, two Fed governors admitted they got the balance wrong and should have kept rates lower for longer.
In 2020, that shifted. The Fed, by keeping rates low, “learned the biggest wage gains went to the lowest earners,” Klingelhofer said. “Coming out of COVID, the third mandate was social stability, compression of the wage gap.”
But the central bank also got burned with its prediction that inflation would be “transitory.” That miss, coupled with the fastest and steepest rate-hiking cycle in modern history, has made the central bank loath to move too quickly on cutting rates this time.
This shift is evident in the tenor of Chair Jerome Powell’s speeches, starting at Jackson Hole, Wyo., in 2022.
