FOMC Statement Analysis: The Disconnected Federal Reserve

By at 3 November, 2021, 8:39 pm


by Raymond J. Keating –

A nation’s monetary authority’s legitimate focus should be on working to maintain a sound currency and price stability. In the U.S., that’s the Federal Reserve’s job. And while the Fed can and often does get thrown off track by the added congressional mandate of maximizing employment, the only real contribution that the Fed can make to such an effort on employment is, again, to provide a sound dollar and low inflation.

Currently, of course, inflation is running red hot, with the Consumer Price Index (CPI) and other inflation measures pointing to inflation outpacing 5 percent on annual basis.

Yet, in its latest FOMC statement on policy and the economy, the Fed declared:

“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. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent…”

Um, pardon me?

Well, you see, the Fed is amazingly unconcerned about inflation. It said:

“Inflation is elevated, largely reflecting factors that are expected to be transitory. Supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to sizable price increases in some sectors.”

I don’t like a whimsical, care-free Fed. I want a worried Fed.

The Fed should be vigilant about price stability, and whether or not the current bout of inflation will ease off when supply chain issues and labor shortages ease up, the Fed’s focus must be on the soundness of the dollar and price stability. After all, the inflation genie has a way of escaping the bottle and proving extremely hard to push back in again.

The Fed needs to put aside bizarre, disconnected, happy talk about inflation running “persistently below” 2 percent, and get back to reality. If the Fed believes, and can make the case, that our current bout with inflation is transitory, then make that case clearly while also communicating plainly that it still stands ever vigilant to move against inflation.

The Fed should be reassuring businesses and investors that it’s serious about the point of monetary policy, rather than glib, as is currently the case. In fact, reining in the monetary base – which Fed policy has pushed to previously unimaginable levels since the late summer of 2008 (!) – would be a sound step for several reasons, including making it crystal clear that the Fed is serious about its job, you know, about keeping inflation in check.

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


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