A Change in Risk Balance Between Fed’s Twin Goals But Not Enough So to Lock and Load a Near-Term Rate Cut Just Yet
January 31, 2024
The first critical modification in today’s FOMC statement declares
The Committee judges that the risks to achieving its employment and inflation goals are moving into better balance.
That’s a new idea. Fed monetary policy is guided by twin mandates that occasionally cannot be addressed simultaneously. The Fed is coming off such a period when price stability was prioritized over maximizing employment because the inflation goal was being missed by a big margin while full employment was essentially secured. A more even risk assessment between missing price stability and maintaining full employment means policymakers are closer to an initial interest rate reduction.
But the Fed then admonishes market participants against getting ahead of themselves:
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.
There’s no indication when they expect to have that confidence, but there is an implicit signal that it will not happen without fairly explicit forewarning in a future FOMC statement or some other rhetorical opportunity. In order to make that determination, officials are considering the usual wide range of incoming information, “including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.”
Chairman Powell’s Press Conference
Powell revealed some interesting developments in monetary policy. Officials are approaching the coming transition of a highly restrictive stance to a lessening degree of tightness as an exercise in risk management. The quest for greater confidence that disinflation is a continuing all the way to a 2% pace doesn’t necessarily need even better price data than has occurred over the past six months. Year-on-year inflation remains elevated, but inflation over the past six months, if continued for another half year, would lower inflation to target. What’s needed is to see more months of good price data, not data whose underlying pace is even lower. With the labor market strong and GDP growth solid, officials have the luxury to peruse more months of data without jumping into an easing cycle in the near term. Likewise, if GDP and labor market indicators were to weaken progressively, then the risk of not maximizing employment would be apt to overtake the risk of price reacceleration, or of inflation leveling off above 2%. In that case, rate cuts would proceed sooner and perhaps surpass the 75 bps thought likeliest by end-2024.
Powell also revealed that among members of the FOMC, there is quite a diversion of views regarding the proper path rates should appropriately take as monetary tightness eases back. There was no vote taken this month to cut the fed funds target, so it’s hard to quantify those disparities. Powell didn’t flatly rule out a rate cut in March but depicted such a decision as quite unlikely based on today’s discussion. There probably just won’t be enough new incoming data between now and then to move the needle all the way to sanctioning a reduction that soon.
A third interesting point was the disclosure that while the unprecedented tightening of monetary policy deserves some credit for for the sharp disinflation from peak already, a significant driving force behind the development is simply the better balance between aggregate supply and demand as the economy has move further into the post-pandemic era. Most of that benefit has now been reaped, creating some uncertainty over how growth and inflation will respond as the effect of supply-side matters fades.
Copyright 2024, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: FOMC statement
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