The Fed’s first and second policy meetings in 2026 saw interest rates left unchanged in the 3.50%-3.75% range, and it gave little indication of imminent reductions as inflation remains above target and labor markets hold steady. Recent comments emphasize that future adjustments will depend heavily on incoming data.
Depending on your school of thought, this hesitation might be good, bad, or ugly.
All three of these are rooted in a question of prudence — a virtue that central planners are supposedly capable of exercising. Inflation remains a risk to control, credibility must be preserved, and a premature easing could destabilize expectations.
All these concerns get the causal story backward. The Fed’s dilemma is not a question of confidence regarding rates. Rather, it is years of monetary manipulation that have left the economy structurally distorted, and no contrived interest rate policy can painlessly correct this.
The US’s core issue does not lie in the realm of prudently imposed interest rates. No, it is the warped capital structure from a series of inflationary and deflationary periods.
Artificially low interest rates during the post-2008 and pandemic-era monetary expansions sent false signals to investors. Projects that appeared profitable due to distorted price signals were begun. Resources were committed accordingly to various lines of production—an allocation that only makes sense in a world of cheap credit.
These projects were exposed as unprofitable as inflation surged and central banks tightened the money supply.
Of course, this is neither new nor is the United States alone in this. Central banks love to play God with interest rates, pretending it is a dial connected but not interconnected to the entire economy.
Through rate manipulation, the economy itself can be controlled according to political wishes. A proper understanding, however, reveals such activity as chicanery — harming, not protecting the economy.
These actions are attempts to manage the consequences of past distortions without allowing the full reallocation of resources the economy requires for sustainable growth.
The oft-cited reasoning by central banks for holding rates high is to ensure price inflation stays subdued. This mindset treats price inflation as a disease, not a symptom of monetary inflation.
While price inflation is certainly something to consider, the real damage occurs when monetary inflation via credit expansion severs the link between genuine savings and investment decisions.
Once that has been done, neither high nor low interest rates can restore coherence to the capital structure by decree. What is needed is the restoration of the link — true and accurate interest rates — so that capital may be reallocated to the most valued production processes.
Keeping rates high or low could restart the same misallocation process. Oscillating between these two errors demonstrates the same fundamental problem: interest rates are being proclaimed rather than discovered.
The Fed’s hesitation reflects this misunderstanding. It is attempting to fine-tune an economy already knocked off kilter by presuming the ability to dictate a key price for the market without ramifications.
From the mainstream policy lens, weak growth justifies easier monetary conditions. This must be rejected. A slowdown following a credit boom is not evidence of insufficient demand, but that previous “demand” was illusory.
Attempts to support this “growth” through renewed expansion simply perpetuates malinvestment. Resources remain tied to unproductive uses; labor remains misallocated; real wages fail to recover because productivity has not been restored.
The unfortunate reality is that recovery requires allowing mistakes to be made manifest and corrected. Monetary policy cannot facilitate or accelerate this process; it can only interfere with it.
Seen this way, the Fed’s problem is not that it does not know the proper speed at which to cut rates but that it is operating under the assumption that it possesses the ability to create real structural adjustments that reflect consumer preferences through interest rate policy.
Much of the Fed’s caution is framed as a defense of credibility. Inflation expectations must be anchored so that markets are reassured that the peso will remain stable. Credibility built upon discretionary management, however, is naturally fragile.
Each intervention creates expectations of future intervention, and each attempt to “smooth” outcomes merely increases dependence upon policy signals instead of market realities.
Proper monetary policy does not come from skillful steering. It comes from refusing to interfere with interest rates so that they can coordinate plans. But every central bank has assumed responsibility for rates, unfortunately, and the Fed is the most influential example of this assumption.
What is needed is not faster easing or tighter restraint. Instead, central banks ought to adopt a posture of humility about their ability and the consequences of monetary policy.
This means, then, that no interest rate schedule can fix this on command. The Fed’s slow approach to rate cuts this year, therefore, is not a solution but just a symptom of a deeper institutional problem. What is needed is for the central bank to relinquish control, not attempt to manage the consequences of its past actions.
The most fundamental danger is not that the Fed might cut rates too late or too early. The issue is the continued reliance on monetary management that is delaying necessary adjustments indefinitely.
Growth and recoveries are not engineered but allowed by governing institutions. The longer capital remains misallocated, the longer central banks attempt to steer the economy, true growth will remain elusive.
Img credit: LTJ Industrial/Deed
Antón Chamberlin holds a PhD in economics from Middle Tennessee State University, as well as Bachelor's and Master's degrees from Loyola University New Orleans and Troy University. He is currently pursuing an MA in Theology at the University of Notre Dame.
