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WASHINGTON — With its larger-than-usual half-point cut to its key interest rate last week, the Federal Reserve underscored its belief that it's all but conquered inflation after three long years.
The public at large? Not so much.
Consumer surveys, including one released Friday by the Associated Press-NORC Center for Public Affairs Research, show that most Americans remain unhappy with the economy, still bruised by an inflation rate that hit a four-decade high two years ago as the economy rebounded from the pandemic recession.
Yet in the view of some economists, the shift toward steadily lower borrowing rates could eventually boost consumer sentiment. Inflation has sunk for more than two years and is nearly back down to the Fed's 2% target. Though that means overall prices are still rising, they're doing so much more slowly.
The costs of some high-profile consumer goods, from used cars to grocery prices, have actually been falling. Economic history suggests that a low, stable inflation rate, with prices rising only gradually, eventually leads Americans to adapt to higher price levels. One favorable factor is that average incomes are now rising faster than prices, allowing more households to afford necessities.
The issue remains a heated one in the political campaign. Seeking to capitalize on public discontent, former President Donald Trump has blamed the Biden-Harris administration's policies for having caused inflation to spike. Yet Friday's Associated Press poll found that voters are now roughly split on who they think would better handle the economy, Trump or Vice President Kamala Harris. Back in June, an Associated Press poll had found that 6 in 10 disapproved of President Joe Biden's economic record.
That is a sign that, at least seen through a political prism, Americans' economic views have begun to brighten.
'Price stability'
Little noticed in a news conference Chair Jerome Powell gave Wednesday was his estimate that the Fed's preferred inflation gauge would amount to just 2.2% for August when the figure is released this week. That would be down dramatically from a peak of 7% two years ago.
Powell also provided a colloquial definition of the Fed's mandate to seek "price stability."
"A good definition of price stability," he said, "is that people in their daily decisions, they're not thinking about inflation. That's where everyone wants to be — back to, 'What's inflation?' Just keep it low, keep it stable."
Powell did not suggest that the Fed had fully succeeded in that goal. He acknowledged that consumers are still "experiencing high prices, as opposed to high inflation," which he said is "painful." But, he added, "I think we've made real progress."
Some of the gloom surrounding the economy has likely been heightened by the political attacks Trump and his Republican allies have waged for three years against the Biden-Harris administration, focused relentlessly on inflation. Many economists have noted that high inflation was a global phenomenon after the pandemic, caused largely by shortages of parts and labor, and was just as severe overseas as it was in the United States.
Consumer confidence
According to the University of Michigan's consumer sentiment survey, Democrats' outlook on the economy is more positive now than on the eve of the pandemic, in February 2020. Sentiment among Republicans, in contrast, has plunged by nearly two-thirds. Among independents, sentiment is still 40% below its pre-pandemic level.
Though average prices won't likely return to where they were before the pandemic, slower inflation can help speed the adjustment process. Groceries still cost much more than they did three years ago, but in the past 12 months they've risen just 0.9%. The average cost of a gallon of gas has plummeted 17% from a year ago, to $3.22, according to AAA. In 14 states it's below $3. The cost of a new rental lease is down 0.7% in the past year, figures from Apartment List show.
On Friday, Christopher Waller, an outspoken member of the Fed's governing board, suggested in an interview on CNBC that there's even a risk that inflation could fall well below the central bank's 2% target in the coming months — a key reason, Waller said, that he supported last week's half-point rate cut.
Waller noted that, excluding volatile food and energy costs, "core" prices rose at just a 1.8% annual rate in the past four months.
If inflation kept cooling at its current pace, Waller said, he could support additional half-point rate cuts.
"Inflation," he said, "is softening much faster than I thought it was going to."
