The Latest Fed Statement and Some Economic Musings

By at 22 September, 2021, 6:39 pm


by Raymond J. Keating –

The Federal Reserve offered up two items of interest on September 22. First was the FOMC statement on the economy and monetary policy. Second was the Fed’s set of projections for where the economy might be headed.

On Inflation, the Fed “detached from reality”

As for the Federal Open Market Committee (FOMC) statement, the Fed highlighted progress on vaccinations rates as the biggest factor in terms of economic recovery, and declared that “indicators of economic activity and employment have continued to strengthen.”

Meanwhile, the Fed’s talk on inflation seems detached from reality. While inflation has spiked in recent months, the Fed stated:

“The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation having run persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer‑term inflation expectations remain well anchored at 2 percent.”

Well, um, okay? But CPI inflation, for example, for the past 12 months came in at 5.3 percent.

But the Fed believes that this elevated inflation is “transitory.” And it might very well be, but that doesn’t mean the Fed should cavalierly ignore these recent increases in the general price level when it comes to running monetary policy.

Disagreement Within the Fed

As for the economic projections, media reporting tends to focus on the median projections, or the central tendencies of Federal Reserve Board members and Bank presidents. However, the range of estimates also is offered, and those reveal how much disagreement exists, and the degree of such disagreement at the Fed.

The FOMC range on real GDP growth expectations came in at 5.5 percent to 6.3 percent for 2021, 3.1 percent to 4.9 percent for 2022, 1.8 percent to 3.0 percent for 2023, 1.8 percent to 2.5 percent for 2024, and then 1.6 percent to 2.2 percent beyond.

As for inflation, the Fed prefers using the index on personal consumption expenditures (PCE) as its inflation measure, and expects 3.4 percent to 4.4 percent inflation for 2021, 1.7 percent to 3.0 percent in 2022, and then settling into a close range around 2.0 percent.

Estimates on the future of the economy, of course, are riddled with uncertainty that can come from seemingly countless areas and directions. So, do what you will with these projections.

Fed Undisturbed by Inflation

What the projections do tell us is that the Fed is rather unconcerned with inflation, and sees the recovery continuing, with the economy then settling in on a slow growth track for as far as the eye can see.

Again, do with that what you will, but hopefully American entrepreneurs – if supported by sound policymaking like low taxes, light regulation, free trade, limited government spending growth, and sound monetary policy – will get the U.S. back on a track of far more robust economic growth. That framework for sound policy is questionable right now given where the Administration and Congress majority want to us on policy.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.


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