Federal Reserve officials expressed satisfaction with the progress made thus far in reducing inflation. However, they remain cautious about the effectiveness of current interest rates in reaching the 2% target over time, according to remarks made by Fed Chairman Jerome Powell on Thursday.
Continuous Evaluation and Adjustment
Powell emphasized that the achievement of the 2% inflation goal is not guaranteed, as inflationary trends have been unpredictable. To address this, Powell assured that the Fed will not hesitate to raise interest rates if deemed necessary. Nevertheless, he emphasized the need for careful and deliberate decision-making. This approach allows for a thorough analysis of not only short-term data but also the risks associated with tightening monetary policy too aggressively.
Balancing Economic Growth and Inflation Control
With strong GDP growth observed in the third quarter, the Federal Reserve recognizes the potential for economic growth to undermine inflation reduction efforts. Furthermore, Powell noted that while minimizing supply-chain disruptions has been a priority, future progress in controlling inflation may rely more heavily on tight monetary policies restricting aggregate demand.
Anticipating Economic Outlook
While economic growth is projected to stabilize in the coming quarters, Powell indicated that further analysis is necessary to solidify these expectations.
The Federal Reserve remains committed to continuously evaluating progress and making necessary adjustments to ensure stable economic conditions.
A Review of the Fed’s Interest-Rate Policy Framework
The Federal Reserve (Fed) has announced that it will conduct a formal review of its interest-rate policy framework in the second half of 2024. This regular 5-year review presents an opportunity for the central bank to reassess its 2% inflation target. Some experts believe that the Fed should consider raising the target or establishing a range.
One significant topic that will be discussed during the review is the unexpected surge of inflation in 2021, which caught many Fed officials and economists off guard. The Fed will analyze the lessons learned from this post-pandemic inflationary period.
Fed Chair, Powell, suggested that one important lesson was related to the Fed’s past practice of not raising interest rates in response to supply-side shocks, such as high oil prices. Previously, it was believed that these shocks should be ignored as tightening policy could lead to unnecessary job losses. However, Powell noted that some of the shocks experienced between 2020 and 2022 have highlighted the limitations of this thinking.
Furthermore, the review will consider whether the economy will return to the era of ultra-low or even zero interest rates that were prevalent prior to the pandemic. From 2008 until early 2020, the Fed grappled with combating deflation, a persistent decline in prices that can be detrimental to the economy. Powell emphasized that it is still premature to assert that the challenges associated with near-zero interest rates are no longer relevant.
Overall, this review presents an opportunity for the Fed to evaluate and potentially modify its interest-rate policy framework, taking into account recent experiences and economic realities.