Somewhat Alarmed at the Federal Reserve's Standing Pat on January 31, 2024...
A first draft of a column for Project Syndicate; the economy appears to be at cruising speed: full employment, low inflation, and in neutral as far as private-sector shocks are concerned. So why isn’t policy in or rapidly moving towards neutral?…
The Federal Reserve stood pat on January 31:
Federal Reserve: Statement: January 31, 2024: ‘Federal Reserve issues FOMC statement: For release at 2:00 p.m. EST: Recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have moderated since early last year but remain strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals are moving into better balance. The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks.
In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 5-¼ to 5-½ percent. In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective.
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Michael S. Barr; Raphael W. Bostic; Michelle W. Bowman; Lisa D. Cook; Mary C. Daly; Philip N. Jefferson; Adriana D. Kugler; Loretta J. Mester; and Christopher J. Waller. <https://www.federalreserve.gov/newsevents/pressreleases/monetary20240131a.htm>
I focus on “decided to maintain the target range for the federal funds rate at [its current] 5-¼ to 5-½ percent…” and on how the FOMC “does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent…”
This announcement has left me somewhat alarmed: the economy appears to be at cruising speed: full employment, low inflation, and in neutral as far as private-sector shocks are concerned; so why aren’t the policy levers in or rapidly moving towards neutral as well?