Taming inflation, Fed is giving us a dose of hope

It's been a rough couple of years, economically speaking, as consumers and businesses accustomed to years of essentially free money, courtesy of the Federal Reserve, had to adjust on the fly to the sudden spike in interest rates.

The Fed appears poised to provide relief in the new year. The central bank has signaled three likely rate reductions in 2024.

Bond markets aren't waiting around for the Fed to act. Rates on 10-year Treasury bonds now are 3.9%, down from 4.9% less than two months ago. And that's with no softening, as yet, from the Fed.

The pervasive feeling is that inflation is close to tamed. Recent inflation rates have come in around 3% and could well hit the Fed's target of 2% within months.

All of this is cause for celebration. It's reason, too, for optimism from businesses and consumers, a commodity that has been in short supply over this painful Fed campaign. This editorial board encouraged the Fed to do whatever it took to stop prices from continuing to spiral and inflation eating away at retirees' savings. Thankfully, we now appear to be on the cusp of a victory, which would define the campaign as one of the Fed's most successful anti-inflation efforts ever. Fingers crossed.

If we were told in mid-2021 it would take two years or so to navigate out of these inflationary woods, most of us would have taken that without hesitation. Gray hairs well remembered the brutal multiyear Fed campaign in the late 1970s and early 1980s that pushed mortgage rates well into the teens. Younger Americans never had seen significant inflation in their lives, but many had heard the scary stories.

Inflation does more than erode purchasing power and harm people's standard of living. It's inherently destabilizing. History has taught us that periods of rampant inflation often coincide with the rise of authoritarian political movements.

It's human nature. People look for something — or someone — to blame when they feel their own economic security threatened. And, in this country, the American Dream — being able to purchase a home and look to a better future for coming generations — already felt jeopardized before the post-pandemic price spikes emerged.

Amid Donald Trump's threats to exact revenge on perceived enemies, the threat of a second Trump presidential term unfortunately is greater than it seemed at the outset of 2023.

Improved economic conditions can only help to stave off that potential disaster.

How will lower interest rates benefit us in practical terms? If the present trends of reduced borrowing costs continue, we should see the turgid home-sales market pick up. That is important in many financial respects, since real estate is a critical driver of our economy. But a lively housing market also restores something psychological.

People increasingly won't feel trapped where they live. When job opportunities in other cities present themselves, the inability to sell a house won't bar people from taking that risk. Likewise, those for whom their home represents their single largest investment, and that's a whole lot of us, will feel freer to tap that equity to finance retirements or other major expenses. On the other side of the transaction, those looking to buy a home can feel more confident their investment's value won't be eroded by higher future rates.

For businesses, reduced borrowing costs will enable them to offer their products and services at more competitive prices. That, too, will provide relief to consumers who remain unhappy about the economy's performance under the Biden administration despite an abundance of statistics — continued GDP growth, relatively low unemployment, wage growth — telling them they shouldn't be so grumpy.

The federal government, running deficits that even liberal economists believe are unsustainable, will catch a break as well. Higher interest rates bring that day of reckoning for the feds ever closer.

The stock market is throwing a party right now in response. The Standard & Poor's 500 index is up over 23% for the year.

Before the party gets out of hand, though, let's remember worrisome underlying realities are lurking. Consumers took on more debt as pandemic-era support programs ended and price increases outstripped wage gains.

Credit card companies are seeing more defaults even as borrowers continue to put more debt on their cards. Credit card rates remain stubbornly high. Utility bills and insurance rates — the unavoidable costs of modern living — continue to rise, putting significant stress on those on fixed incomes, as well as those whose wages have stagnated.

And, of course, the Fed will need to stay vigilant in case all this good news is some sort of elaborate head fake.

But for now, as we enter the holiday season and approach the end of 2023, the Fed under Chairman Jerome Powell should, tentatively, be congratulated for a job well done.