In April 1974, Arthur Burns cut the federal funds rate by 50 basis points while oil prices were still climbing from the Arab embargo. Inflation was already running above 10%. Within 8 months, the Fed reversed course and hiked aggressively, triggering a recession that lasted 16 months. Burns didn't cut because the data supported it. He cut because the political pressure to "do something" about a slowing economy overwhelmed the institutional discipline to wait. The Fed faces a quieter version of that same trap right now, and it should refuse to walk into it.
The Transitory Argument Has a Shelf Life
The case for cutting rests on a single premise: that the inflation driven by the Middle East conflict is transitory, meaning it will fade before embedding in expectations. Michael Gapen at Morgan Stanley made this argument explicitly on April 22. He may be right. Energy shocks do tend to dissipate.
But "tend to" is doing enormous work in that sentence.
PCE already sits at 2.5%, a full 50 basis points above target before the war's energy pass-through has fully registered. The Reuters poll's Q2 PCE forecast jumped to 3.7%, up 30 basis points from late March. EY-Parthenon projects headline inflation could reach 3.58% if Strait of Hormuz disruptions persist. These are not numbers that describe a problem resolving itself. They describe a problem accelerating.
Consumer inflation expectations have surged to nearly 5% over the next year. That figure matters more than economists want to admit. When households expect prices to keep rising, they pull forward purchases, accept higher wages as insufficient, and begin behaving in ways that make the expectation self-fulfilling. The University of Michigan's inflation expectations survey was one of the few reliable leading indicators before both the 1979 and 2022 inflation surges. It is flashing the same signal now.
A 25-basis-point cut would save a homeowner with a $400,000 mortgage roughly $65 a month. It would tell every price-setter in the economy that the Fed blinked.
The Labor Market Isn't Screaming for Help
Unemployment sits at 4.3%. GDP growth is projected at 2.4%. These are not distress signals. They are the numbers of an economy absorbing a shock without collapsing. Governor Waller acknowledged this tension directly: if inflation risks outweigh labor market risks, the correct move is to hold.
I'll concede one point to the doves: monetary policy cannot fix a supply shock, and holding rates high while energy prices spike does impose real costs on borrowers who did nothing wrong. A small business owner paying prime plus 2 on a variable-rate line is carrying north of 10% right now. That hurts.
But the alternative is worse. Cutting into a supply shock tells credit markets that the Fed will accommodate price pressures it cannot control. That accommodation gets priced into long-term rates, mortgage spreads, and inflation breakevens. The 10-year yield doesn't fall when the Fed cuts if the market reads the cut as inflationary. It rises. And then the Fed is stuck: inflation re-accelerating, long rates climbing, and the only tool left is a tightening cycle steeper than the one it was trying to avoid.
Look at the FOMC itself. 7 of 19 participants see no cuts warranted at all in 2026. Nearly a third of the 103 economists polled by Reuters in April agree. Wells Fargo eliminated its cut forecasts entirely on April 6. The consensus for patience is not a fringe position. It is the position that has been gaining ground every week since the war began.
The Fed's credibility is not an abstraction. It is the mechanism by which a 3.50% to 3.75% rate actually restrains inflation expectations. Sacrifice that credibility for a $65-a-month mortgage savings, and you inherit the problem Arthur Burns spent the rest of the decade trying to fix. He never did. Paul Volcker had to break the economy to clean it up. The cost of patience is real. The cost of impatience is compounding.
