Stubbornly high inflation has put members of the Federal Reserve in a tough spot as policymakers have to think a lot harder about whether they’re engineering a “soft landing” or a bumpy one.

As Creditnews reported, Fed Chair Jerome Powell seemingly went off-script last week by reaffirming that interest rates have likely peaked for now. He and his policymaking brass left three rate cuts on the table in 2024.

This caught many economists by surprise, given that inflation has topped forecasts for three consecutive months and appears to be re-accelerating.

The Fed’s conventional playbook suggests now is the time to fight harder to bring inflation back down. But policymakers have seemingly broken from convention as pressure to cut rates continues to mount.

According to Mohamed El-Erian, president of Queens’ College and chief economic adviser at Allianz, the Fed has taken a big risk by opening the door to rate cuts despite elevated inflation.

“It is not often that you see a reputable central bank revise up its inflation and growth projections and yet strengthen a dovish tilt to its policy stance,” he wrote in a recent op-ed for the Financial Times.

The U.S. central bank’s recent decision signals “a willingness to tolerate higher inflation for longer and an openness to slow the ongoing reduction in its balance sheet,” he said.

Lydia Boussour, senior economist at EY-Parthenon, told CNN that the Fed’s latest posturing means policymakers are “willing to be a little bit more patient” in achieving their 2% inflation target.

“[M]y sense coming out of this month’s meeting was that Fed Chair Powell wants to get this easing cycle going sooner rather than later,” she explained.

Although the Fed won’t explicitly admit it, achieving 2% inflation isn’t the focal point it was just a few years ago.

2% or higher?

For what it’s worth, Powell told reporters last week that the Fed’s latest policy guidance doesn’t mean the central bank is willing to tolerate higher inflation.

“No, it doesn’t mean that,” Powell said. “We did mark up our growth forecast, and so have many other forecasters, so the economy is performing well, and the inflation data came in a little bit higher as a separate matter and I think that caused people to write up their inflation [forecasts].”

Economists have long questioned the Fed’s 2% inflation target, and for good reason. As the Council for Foreign Relations notes, there’s nothing scientific about aiming for 2% inflation—and focusing too much on that target could derail other economic indicators tied to employment and GDP growth.

Jason Furman, a Harvard professor and former director of the National Economic Council, argued last year that the Fed “should carefully aim for a higher inflation target.”

“In the short run, the Fed should be aiming to stabilize inflation below 3%,” Furman wrote in an op-ed for The Wall Street Journal. “If it can achieve this goal, then it should shift to a higher target range for inflation when it updates its overall strategy around 2025.”

His reasoning is that 2% inflation is no longer a reasonable target, and that if the Fed were starting from scratch, it would likely choose a higher level.

Even Mark Zandi, the chief economist at Moody’s Analytics, thinks the current inflation target could undermine the economy. “Do we want to sacrifice the economy to the alter of the 2% inflation rate?” he asked while suggesting that 3% could be a better target.

Yet, high-ranking central bankers, including St. Louis Fed president James Bullard, are vehemently opposed to any talks of abandoning the inflation target.

“We do have a mandate legislated by Congress and the President to maintain stable prices for the U.S. economy, Bullard said. “We've defined stable prices as 2% inflation. That’s an international standard that was developed in the 1990s. I think it would be a disaster to abandon that standard.”

Despite this mandate, there’s growing political pressure on the Fed to start cutting rates, which is a backhand way of saying that officials should abandon or increase their inflation target.

Political pressure mounts

With Americans feeling the pinch of higher interest rates, leading Democratic senators have called on the Fed to immediately reverse course on its policy.

The Fed’s decision “to raise interest rates rapidly, and keep them high, has resulted in higher costs for home purchasers, higher rents, and reductions in new home and apartment building,” Senator Elizabeth Warren and three Democratic colleagues wrote in a letter to Chairman Powell.

Senate Banking Committee Chair and fellow Democrat Sherrod Brown penned a separate letter to the Fed chairman arguing that high rates are “no longer the right tool for combating inflation.” Brown continued: “I urge the Federal Reserve to ease monetary policy this year.”

It’s not just Democrats who’ve made interest rates into a political issue. Before Covid, President Trump railed against Powell for not cutting rates to “zero or less.”

The key difference between then and now is Americans are currently facing record-high credit card rates, 17-year high auto finance rates, and a more than doubling in their mortgage rates. Whether directly or indirectly, Fed policy influences the borrowing rates Americans pay.

As a result, many Americans have reached a dangerous threshold on their personal debt, with interest payments on non-mortgage debt nearly matching mortgage payments for the first time.