Since the start of 2024, higher-than-expected inflation data has prompted caution from top officials at the Federal Reserve. Experts are suggesting that the central bank is determined not to reduce interest rates too soon, in an effort to avoid repeating past mistakes.

Mark Higgins, author of "Investing in U.S. Financial History: Understanding the Past to Forecast the Future," warns about the potential dangers of the Fed loosening monetary policy prematurely, drawing parallels to the late 1960s when such action resulted in unfavorable consequences.

The Federal Reserve is now adopting a measured approach, signaling that it is not in a rush to lower its benchmark rate. Previous expectations of multiple rate cuts this year appear less likely as recent reports indicate that inflation is persisting at a higher level than anticipated. This hesitation is believed to be the reason behind the decreased probability of a rate cut in June, with the CME's FedWatch measure of futures market pricing showing less than a 20% chance, down from nearly 80% a month prior.

Chair Jerome Powell, addressing the media after a recent meeting in March, emphasized the Fed's readiness to maintain the current target range for the federal funds rate for a longer period, considering the favorable state of the economy and the low unemployment rate, which is below 4%. Powell's remarks suggest that the central bank views the risks of allowing inflation to persist as outweighing the risk of triggering a recession.

Higgins further highlights the mistakes the Federal Reserve has made in its history, including the failure to prevent the deepening of the Great Depression in the early 1930s and the premature withdrawal of policy measures during the inflationary period of the 1970s. These missteps continue to influence the central bank's decision-making process today.

The caution being exercised by the Federal Reserve stems from the fear of repeating the mistakes of the past. The central bank is expected to remain extremely careful, even if it means keeping rates higher for a longer duration. The economy faced repercussions during the early 1980s when high inflation forced then Fed chair Paul Volcker to adopt aggressive measures to tighten the money supply, with interest rates reaching an all-time high of 22.36% in July 1981. Presently, the benchmark rate ranges between 5.25% and 5.5%.

Steven Eisman, Neuberger Berman's senior portfolio manager, highlights Powell's concerns about emulating Volcker's approach and the potential negative impact it may have on the economy. Eisman suggests that the current state of the economy, with inflation trending downward and the economy remaining strong, indicates that rate cuts should be avoided to avoid a potential resurgence of inflation.

In his recent remarks, Powell also alluded to the cautionary lesson from Volcker's interest rate policy, emphasizing the need for policymakers to avoid reducing policy restraint too soon or too much. Premature easing could lead to a reversal in the progress made in controlling inflation, ultimately requiring even tighter policy to bring inflation back to the target of two percent.

As the Federal Reserve treads carefully in the face of rising inflation, it remains to be seen how long the central bank will continue to hold rates higher and whether the cautious approach will successfully steer the economy.