Monetary Policy Objectives

🚨 Fed Policy News - Interest Rates Unchanged 🚨 Today, the Federal Reserve announced a pivotal decision to maintain the federal funds rate at its current range of 5.25% to 5.50%. While this outcome aligns with market expectations, the Fed's tone was notably less dovish than many had anticipated. 🔍 Analyzing the Fed's Stance The Fed's hesitation to initiate interest rate cuts stems from a strategic outlook. Despite projections from December 2023 suggesting three rate reductions in 2024 and four in 2025, the current economic climate doesn't warrant immediate action. 🚀 Inflation continues to remain above the Fed's 2% target, challenging the narrative of rapid monetary easing. Moreover, the economy, buoyed by robust GDP growth and a resilient job market, seems to be withstanding the high-interest regime, albeit with a deceleration in payroll growth. 📝 Fed's Statement Insights In their recent statement, the Fed emphasized: "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." The meaning? The Fed isn't ready to cut rates and wants to see more easing inflation data. 🏦 Understanding the Fed's Dual Mandate The Fed's core objectives are twofold: fostering full employment and maintaining stable prices. The current unemployment rate of 3.7% in December, coupled with over 9.0 million job openings, indicates a robust employment scenario. However, the battle against inflation is ongoing, justifying the unchanged interest rates. 📊 Inflation: A Key Factor in Future Decisions Today's Fed statement was clear: "Inflation has eased over the past year but remains elevated," and, "The Committee remains highly attentive to inflation risks." This persistence of high consumer inflation implies that the Fed is prepared to maintain high interest rates for an extended period. 🔮 Forecasting Ahead We anticipate a gradual decline in both Total CPI and Core CPI, alongside Total PCE and Core PCE. However, reaching the Fed's 2% inflation target might take until mid-2024 for Total CPI and the latter half of 2024 for Core CPI. Given these projections, our expectation is that the first Fed rate cut may not occur until Q3 2024, with June 2024 as a potential earlier date, contingent on substantial progress in curbing inflation. 💡 Stay Informed Navigating these economic trends requires keen insight and strategic planning. For continuous updates and analyses, stay connected. Share your thoughts on how these developments impact your business strategies in the comments below. #InterestRates #Finance #Economy

Why Has the Fed Cut Interest Rates by 0.5% While the Bank of England Held Steady? The recent decision by the Federal Reserve to cut interest rates by 0.5% while the Bank of England has chosen to keep rates unchanged highlights a key difference in how these central banks approach their economic responsibilities. Although both are tasked with maintaining financial stability, their mandates and priorities diverge, leading to different strategies in response to similar economic conditions. The BoE’s primary mandate is to manage inflation, thereby ensuring price stability by keeping inflation around its 2% target. In recent times, the UK has experienced inflationary pressures, partly driven by supply chain disruptions, rising energy prices, and other global factors. By the BoE holding rates steady, they signall that controlling inflation is more important than short-term economic growth. This conservative stance reflects the view that failing to address high inflation could lead to greater economic instability in the long run. In the BoE’s framework, the priority is clear: inflation management comes first, and the focus is on preventing inflation from spiralling out of control. Growth is a secondary consideration. Therefore, even if growth slows down or there are concerns about a potential economic downturn, the BoE’s stance remains firmly centred on inflation control, as persistent inflation can erode purchasing power and destabilise the broader economy. A cut in interest rates would risk fuelling inflation further, which the BoE sees as too high a cost to bear at present. On the other hand, the Fed operates under a dual mandate. This means the Fed must balance two equally important objectives: keeping inflation stable while also promoting maximum employment and economic growth. With this dual mandate, the Fed has a more flexible approach, as it is required to support economic activity while keeping an eye on inflation. In the current environment, the Fed has seen signs that US economic growth is weakening—whether due to slowing demand, challenges in the labour market, or external global pressures. Although inflation remains a concern, the Fed judged that an interest rate cut was necessary to prevent a significant economic slowdown. By cutting rates, the Fed aims to encourage borrowing, investment, and spending, which can help stimulate economic growth and support employment levels. This decision reflects the Fed’s broader remit to foster conditions that promote both stable prices and robust economic activity. The 0.5% rate cut, therefore, is not just a reaction to inflation but also a pre-emptive measure to avoid a potential recession or economic stagnation. Therefore, the difference in response is likely due to diverging mandates. The BoE, focused almost entirely on controlling inflation, therefore keeps rates steady to prevent further inflation. But, the Fed is balancing inflation concerns and economic growth/employment, so cuts rates.

The Federal Reserve Should Offset Trump’s Tariff Inflation. Those hardy perennials of economics, supply and demand, determine how much of Trump’s  tariffs will result in higher consumer prices. Unless there are very unusual circumstances, however, price increases are highly likely. As a result, the Federal Reserve must decide whether to offset this inflationary effect of tariffs in its monetary policy objectives. And on this there is legitimate disagreement. Tariff-generated price increases are a one-time event, unlike the inflationary pressure of faster annual money supply growth, so some policymakers say the Fed should do nothing. There is a kernel of truth to this argument, but recent revealed preference for stable prices suggests otherwise. Voters in exit polls during 2024’s presidential election complained about the cumulative rise in prices during the Biden administration, and turned the Democrats out of office. The Federal Reserve should recognize this preference for a stable price level. In 1977 Congress amended the Federal Reserve Act to specify the objectives of the central bank as follows: “The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the money and credit aggregates… to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” The amendment clearly specifies stable prices, not the annual rate of inflation, and they are not the same.   In 1996 Fed chairman Alan Greenspan warned his colleagues about inflation targeting: “I will tell you that if the 2 percent inflation figure gets out of this room it is going to create more problems for us than I think any of you might anticipate.” It was not until January 2012, under Federal Reserve Chair Ben Bernanke, that the Federal Reserve formalized the 2 percent inflation target as the “statutory mandate.” The amended Federal Reserve Act of 1977 makes price level stability, and not the annual rate of inflation, the “statutory mandate.” If prices rise by the Federal Reserve’s 2% per year, then the price level will increase by about 50% after 20 years, hardly the meaning of price stability. Voter preferences as revealed in the 2024 presidential election suggest that the price level is the right objective. The implication going forward is that the Fed should offset tariff-induced upward price pressure in its monetary policy objectives. Good luck, Bill Silber, March 16, 2025, 4pm. #tariff #economy #inflation #FederalReserve