The Main Qs and As from the Fed March 2024 meeting
What questions are NOT being asked about Fed policy...but should be?
Q- Once again the Fed Median forecast anticipates 3-rate cuts this year- is that the Fed’s Plan?
Answer- No
The Fed does not have ‘a plan’ or a promise to cut rates. This finding is simply the median of individual forecast paths made by Fed members on outlooks they submit before the Fed meeting. The media if among all forecast submission...but REMEMEBR not all FOMC members vote at meetings- another reason why this metric is indicative and not policy.
Q- The Fed has a 2% inflation target some want it lifted to 3%- could it happen?
Answer – No
The central bank adopted 2% as a target and among central banks with inflation targets the target is set at 2%. Were the Fed to change its target to 3% then it would not have a solid target of 3%. Since it changed its target once it could change it again, so changing the target has the problem of making any subsequent target less credible.
Q- What happened to higher for longer??
Answer – that’s a really good question… it died a slow painful death: RIP.
The Fed refrained from hiking rates as much as it did in past episodes to try and achieve a soft landing. It adopted the slogan ‘higher for longer.’ TO ME…this phase had a dual meaning. It meant that he was not going to push hard to achieve 2% quickly. So inflation was going to be higher for longer and so would interest rates – but rates would not peak as high as they did in past cycles. This was Powell’s compromise that allowed policy to focus on a 2% inflation rate but not to strangle the economy getting back to it... or suffering the credibility problem of shifting the target in any formal way. However, once the Fed signaled it was ‘done hiking rates’ (we have likely seen the peak in this cycle) attention focused on rate cuts and their schedule and pace. That undermines ‘higher for longer.’ Stick a fork in ‘higher for longer’ it’s done.
Q- Has the Fed ‘replaced’ its dual mandate with the objective of achieving a soft-landing?
Answer- No. Powell begins each post-FOMC meeting press conference stating the Fed’s fealty to its dual mandate.
Q- Can the Fed achieve a soft-landing?
Answer – It depends on what that means. The Fed has not defined it but has expressed it as an objective.
Q- Does the Fed’s soft-landing objective interfere with it achieving its dual mandate?
Answer- This is an interesting question.
And as I note above, it depends on what a soft-landing is. Historically the things called ‘soft-landings’ have been episodes with minor increases in the unemployment rate (hence soft). But many of these did not successfully contain, control, or reduce inflation. Since we are in a period where inflation has been above target for 3-years running ‘soft-landing’ seems the inappropriate choice for policy since historically it has favored the unemployment rate which is already not far from a 70-year low, while inflation has been over the target-top for three-years running.
Q- The Fed says its policy is restrictive – that’s all- is it enough?
Answer- The Fed acts as if the word ‘restrictive’ is binary.
The Fed -oddly, all Fed members -refer to the policy as being ‘restrictive’ without a modifier. But that word is not binary. Policy is not barely restrictive, highly restrictive, or sufficiently restrictive. The Fed’s reluctance to take on this issue is not reassuring. We know because it is seeking a soft landing it is trying to get by with as little tightening as possible. It makes the issue of describing its restrictive policy more difficult. Its restrictive...next question…
Q- Are there hidden costs associated with a soft-landing policy?
Answer- Oh, yes.
One aspect of ‘higher for longer’ is its impact on fiscal policy and debt costs. Even if ‘higher-for-longer’ is dead, interest rates are still lingering at high levels even if the Fed does go ahead with rate cuts. And these higher rates are having an adverse effect on fiscal policy by causing debt service to absorb an increasingly large proportion of government resources. You do not hear anyone blaming the Fed for high debt service costs, but Fed policy is the reason for it. Had the Fed dispatched inflation more quickly debt service costs would now be lower.